Will This Downgrade Hurt Yum! Brands (YUM) Stock Today?

NEW YORK (TheStreet) --Shares of Yum! Brands Inc. (YUM) are lower -0.71% to $75.80 in pre-market trading on Monday following a ratings downgrade to "neutral" from "overweight" at JP Morgan  (JPM).

The firm downgraded the quick service restaurant company based on a valuation call, driven by the company's new reporting structure.

The firm also believes shares of the company are already pricing in a China recovery through full-year 2015.

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TheStreet Ratings team rates YUM BRANDS INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate YUM BRANDS INC (YUM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, increase in stock price during the past year and notable return on equity. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • YUM's revenue growth has slightly outpaced the industry average of 3.8%. Since the same quarter one year prior, revenues slightly increased by 0.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $586.00 million or 23.10% when compared to the same quarter last year. In addition, YUM BRANDS INC has also vastly surpassed the industry average cash flow growth rate of -31.16%.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • YUM BRANDS INC' earnings per share from the most recent quarter came in slightly below the year earlier quarter. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, YUM BRANDS INC reported lower earnings of $2.36 versus $3.37 in the prior year. This year, the market expects an improvement in earnings ($3.60 versus $2.36).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, YUM BRANDS INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: YUM Ratings Report

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