YUM Preview: Trading on Traffic Trends

Yum! Brands (YUM - commentary - Cramer's Take) is being taken to the woodshed, down nearly 30% in the last week, as investors ... well, who really knows what is going on in any stock anymore? Yum! is trading at 13 times the 2009 estimate, and the numbers have not even budged.

This could just be a redemption-driven selloff, but a realistic assessment of the sudden change in the consumer environment also indicates that the selloff could be justified as numbers are about to be slashed while consumers just stay home. Yum!'s earnings report tomorrow morning will be telling, as management will have to discuss recent traffic trends, which is all that the stock will trade on at the moment.

As an aside, the company will probably report 54 cents of EPS on $2.8 billion in revenue, but who will really about the past?

There are a few additional elements to the story that will attract investor attention. Yum! is one of the better international plays, which helped it in a falling dollar scenario, but with this summer's turn in the buck, revenue will be under further pressure. KFC is dominant in China, which was a highlight until the Olympics ended. Now that China is "gone," no one will care.

The commodity collapse should help on the cost side, as all restaurant chains were battling terrible ingredient inflation, but food costs are not coming down as fast as the food stocks are. Margins will still be under some pressure until food prices totally collapse -- if they ever do. Management was looking for $100 million in additional food cost this year, with poultry being the highest impact item.

On the bright side, Yum!'s lower-end concepts have some trade-down potential from mid-market casual chains, which may support comps and the stock a bit more vs. the higher-end chains.

The call starts at 9:15 a.m. EDT.

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At the time of publication, Dvorchak had no positions in the stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.