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Why Yum! Brands Lost 10% Last Month

What happened

Shares of Yum! Brands (NYSE: YUM) gave up 10% in October, according to data from S&P Global Market Intelligence, as the fast-food titan posted an underwhelming earnings report at the end of the month.

Pizza Hut continued to struggle in the quarter, and comparable sales and profits both came in below expectations. As you can see from the chart below, most of the stock's decline came at the end of the month after the third-quarter earnings report.

YUM data by YCharts.

So what

Yum! Brands' numbers weren't terrible by any means, but they weren't enough to keep up with the market's lofty expectations. Comparable sales increased 3%, held down by flat growth at Pizza Hut, and were slightly below estimates of 3.3%.

Image source: Getty Images.

Overall revenue fell 4%, to $1.34 billion, slightly below expectations, as the company continues to refranchise restaurants. Core operating profit improved 6%, but Yum! took a $60 million writedown, or $0.15 per share, on its Grubhub investment. This was a reflection of the recent plunge in the delivery app's stock as it has struggled to fend off competition.

As a result of the change in Grubhub's valuation from 2018 to this year, Yum's adjusted earnings per share fell from $1.04 to $0.80 -- worse than the analyst consensus of $0.94.

Outgoing CEO Greg Creed sounded satisfied with the results, saying, "Following a very strong first half of 2019 and in line with our expectations, third-quarter results were consistent with our long-term growth model."

Now what

Coming into the report, Yum's stock had already gained nearly 30% over the last year. It looks a bit pricey for a restaurant stock, as it now trades at a price-to-earnings ratio of 27.5.

The Grubhub headwinds are temporary, but even with solid growth and aggressive restaurant expansion around the world, the stock seemed due for a pullback, given its high price.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Grubhub. The Motley Fool has a disclosure policy.


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