Yum! Bucks the Trend Before It Starts


For the past week or two, we've incessantly heard about the lousy third-quarter results to pour in, which will then trigger a down market. It's only the beginning of earnings season, so there's plenty of time for an upset -- oh, wait, a major international company has already beaten EPS estimates and shows healthy growth. How come people pay so much attention to market predictions but then never seem to notice when they're wrong?

Reality bite
Analyst estimates, by their very nature, are not something many Fools support. Being estimates, they shouldn't hold that much water with investors, but for some reason when a company comes in over or under, the stock bounces around. But they exist, so we deal with them. The market has been biting its nails because of analysts' predictions of widespread contractions among major public companies. The 1%-3% shrink isn't too substantial, if not irrelevant, but it's enough to have investors spooked.

Luckily, we have a few early reporters that have already stood up to the man. Yum! Brands (NYS: YUM) posted a stellar third quarter. Top-line revenue missed by $70 million, but the bottom line picked up the slack with an impressive 22% profit growth. Same-store sales posted a 6% gain as well. As if to laugh in the face of doomsday analysts and pundits, the company raised guidance for the end of the year.

Given that Yum! is a very internationally oriented company, this doesn't say too much about the strength or weakness of the U.S. economy, but I'll take what I can get. The company opened 192 new stores in China during the quarter. And even though that double-digit growth got its boost from overseas, U.S. performance wasn't too shabby. Domestic stores had identical same-store sales growth and dramatically improved margins. Given the difficulty megacompanies face in growing their business organically, Yum! seems to be having no issue -- predicting 2013 EPS growth of more than 10%. Sorry, doomsdayers -- you'll have to look elsewhere for support of your theories.

Dead-set on victory
In the U.S., we aren't the biggest fans of Taco Bell and KFC -- two brands Yum! operates. Taco Bell was just a few years ago considered to be the bottom of the fast-food hierarchy -- reserved for skateboarders and those with herbal prescriptions. But now, even the 1% is taking notice of the brand. At the recent Value Investing Congress, David Einhorn made his case for shorting Chipotle (NYS: CMG) . Among his reasons was substantial competition from Taco Bell's new burritos and burrito bowls. In fact, Einhorn humorously stated that "Taco Bell has started to eat Chipotle's lunch." Clever, David. I'm not sure I would take a T-Bell item over anything at beautiful Chipotle, but then again I haven't been to a Taco Bell since ...4 a.m.

Yum!'s CEO expects 1,750 new Taco Bell, KFC, and Pizza Hut stores to be built abroad in the coming years.

Other notables
Like I said, this is only the beginning of earnings season, and we still may end up disappointed. But Yum! isn't the only shop to give investors a positive report for the dreaded third quarter. Earnings bellwether Alcoa (NYS: AA) handily beat estimates for revenue even while posting a net loss. The loss itself wasn't third-quarter blues, either-- it was due to continued depressed aluminum prices.

Overall, I am waiting for some hard proof of this sharp pullback we were supposed to see. It's only day two, so I could easily be wrong. For now, though, I'll be boasting about the uselessness and disservice of analyst estimates and pundit fearmongering.

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The article Yum! Bucks the Trend Before It Starts originally appeared on Fool.com.

Fool contributor Michael Lewis has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services recommend Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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