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Apr 20 2011:
COMPARING YUM BRANDS and MCDONALDS
After hours, the
earnings came out on YUM. They are up 7% or .63 cents a
share before a special one time cost which reduces the
earnings to .54. YUM's earnings continue to get good but
here is why I prefer my strategy over owning any shares. I
am sure earnings like those today will jump the stock higher
for a while and might even set a new higher trading range,
but overall I prefer to be on the cautious side. The
earnings for the past 5 quarters are below. As long as the
earnings can stay above last year, then YUM will trade
higher or at least in a higher range, but earnings from the
US were down. Overall just 1%, but it shows the weakness of
the world's biggest economy. In the US not only is there
more competition, but the cost of food is being reflected in
the declining US dollar. Meanwhile earnings outside the US
and in particular Asia are very good, up 18% in China and 5%
worldwide. This is excellent news, but lets look first at
the chart below. Since March's earnings YUM stayed sideway
until September when YUM turned in a stellar performance and
the forward looking statement promised more growth. The Dec
earnings of .63 cents was good but not quite what a lot of
investors believed after September's earnings. The stock
pulled back from Dec through to Feb and despite the market
itself moving higher into Feb 2011, YUM moved to a low on
Feb 24 of $48.67. But while the earnings were good after
hours, overall the earnings of .63 cents matches December's.
The lower Bollinger is my key to when this stock may set a
new trend. I have set my trading range between the upper
Bollinger from the previous range and the lower Bollinger
from the most recent move, around the $48 strike.
Once the lower Bollinger holds
for a few months and can confirm a move to a higher trading
range then I will move up, but until then every move to the
lower Bollinger should give me the opportunity to sell more
naked puts within my range.
Meanwhile here is how I view
both YUM and the other large restaurant stock, McDonalds.
Now here is a comparison chart
of both companies. The larger gain in YUM is evident plus
YUM has set two new higher highs. Meanwhile McDonalds has
failed to set a new high since December of 2010. This is the
reason for the larger return on equity and return on
investment for YUM. Meanwhile though McDonalds has a better
dividend, much better debt to capital ratio, lower PE,
better earnings, cash flow and of particular interest book
value. However the market cap is much larger for McDonalds
but revenue is much better at YUM. The two charts below show
that both have decent trading ranges. I find both stocks are
excellent for selling naked puts. Earnings continue to
support a decent trading range for both stocks particularly
watching the lower bollinger.
SUMMARY:
Both YUM
and McDonalds have been excellent stocks for my portfolio.
Recent earnings from YUM show good growth outside the US,
and while analysts talk up the stock, I tend to look at it
more for its range. At .63 cents the recent quarter matches
December and does beat last year's same quarter. However
could the stock be ahead of itself? The PE is higher on YUM
than McDonalds, debt is larger, book value less, but on the
other hand YUM has provided a better return on equity and
investment for shareholders and has set two new highs since
Nov 2010. I always take a different approach to stocks and
both of these are good examples. For my strategy of selling
naked puts I am seeking stability of price and a
trading range rather than being concerned about the stock
climbing higher. In fact, a higher priced stock often
increases the risk of the stock pulling back in any selling
and could catch my naked puts and put me in the money.
Unless earnings can justify a higher PE often a run-up can
be just as quickly followed by a run-down.
When I sell naked puts they
are often at risk of assignment for 30 to 60 days. A range
bound stock though, gives me some idea as to what the future
could hold and what the high and low areas of the stock
could be. While its a judgment call as to where the stock
might go, I have some "crystal ball" through the Bollinger
bands. So when the stock moves to the lower bollinger I can
sell my puts and when it moves up I can buy them back.
However, if I am wrong and the stock pulls back too far, and
I get assigned before I actually wanted the shares, at least
I am in a stock that has met all my parameters, including
dividend, reasonable PE, large cap, solid earnings,
increasing dividend.
Any investor
could take this same concept and apply it to stocks they
follow. The trick is having faith in the stock and in the
technical analysis they do in order to have comfort in the
price strikes they choose. |
