Why Yum! Brands Remains A Solid Recovery Play

Stock Market

Despite COVID-related challenges, restaurant stocks like Yum! Brands (YUM) have recovered quite well over the past year. YUM is trading well above its lows set in March 2020 and bounced back to pre-pandemic price levels in December.

However, the restaurant franchising giant (whose brands include KFC, Pizza Hut, and Taco Bell) has been trading sideways since then as investors digest its post-recovery prospects.

As the overall market flirts with a potential correction, YUM could sell off in the near-term. That said, with earnings set to recover fully next year, shares may still have room to bounce back towards all-time highs.

YUM Stock And Its Gradual Recovery

It’s important to note that Yum! Brands is no longer the owner/operator of its flagship brands in China. The company has a long history of franchising restaurants in the world’s second-largest economy, but Yum! spun-off these operations in 2016 into Yum China Holdings (YUMC).

While YUM stock has zero exposure to China’s post-pandemic recovery, it has been, and will continue to be, a way to play the post-pandemic recovery in the US and other non-China international markets.

The “new normal” continues to affect the restaurant industry, but YUM has recovered nicely since Spring, as reflected in its quarterly results. After noticeable declines in revenue in the March and June quarters, the company’s sales began to rebound in the quarter ending Sep. 30.

Due to the effects of lockdowns in the middle of 2020, earnings per share for the year took a noticeable hit from the prior year ($2.94 per share versus $4.14 per share in 2019). 

Yet, with earnings set to make a big rebound in 2021, and surpass 2019 levels in 2022, there’s enough in play to possibly send shares higher in the next year.

Why Shares Could Rebound To All-Time Highs

Investors gradually bid up YUM stock through the final months of 2020 in anticipation of a post-pandemic recovery, but with markets teetering on a correction, shares have struggled to gain more ground.

Following YUM’s solid recovery from its 52-week low of $53.90 per share to around $104 currently, could YUM stock start pulling back as well?

It’s possible in the near-term, but as the company’s earnings continue to move above pre-outbreak levels, the stock will likely continue to bounce back towards its all-time high.

Analyst estimates call for earnings of $3.99 per share in 2021, and $4.55 per share in 2022. Assuming it maintains its current forward P/E multiple (around 26x), YUM has a shot at getting back to its high-water mark ($119.59 per share set back in September 2019) within the next year.

What Analysts Are Saying About YUM Stock

YUM currently has a Moderate Buy consensus rating among 13 sell-side analysts. 5 analysts rate it a Buy, 7 say Hold and 1 recommends a Sell.

The average analyst price target of $112.50 per share implies around 8% upside potential from current levels over the next 12 months. Price targets range from a high of $125 per share to a low of $103 per share. (See Yum! Brands stock analysis on TipRanks)

Bottom Line: Yum! Brands May Have More Room To Run In 2021

With analysts anticipating the world getting back to normal by 2022, restaurant franchising giant Yum! has the potential to fully recover over the next twelve months.

Assuming results land in line with expectations, the stock could bounce back to its prior all-time high of just under $120 per share. In short, those who missed its initial recovery rally may still find opportunity in YUM stock.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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