A Board Member Thinks Yum Isn’t That Bad

Robert Walter, a member of Yum! Brands, Inc. (NYSE:YUM)’s Board of Directors, bought 35,000 shares of the stock on February 6^th at an average price of $61.95 per share. This purchase came shortly after a disappointing report from the restaurant company, whose three core brands are Pizza Hut, KFC, and Taco Bell. While last quarter was not particularly bad- net income was down 5% from its levels a year earlier and a small increase in revenue- Yum expects to report a decline in earnings this year as the Chinese business underperforms. The company claims that this is due to supply issues which would be resolved within a year, putting Yum back on track, but the stock has seen a number of downgrades including from Goldman Sachs.

The insider purchase- and a substantial one at that- shows that at least one insider is very confident in Yum’s prospects. Insiders should hesitate before buying shares, since it reduces their diversification, unless they think that the potential gains are high enough and certain enough to overwhelm the benefits of diversifying their wealth. Studies show that stocks bought by insiders tend to narrowly outperform the market (learn more about studies on insider trading).

With its iffy fourth quarter in the books, Yum! Brands, Inc. trades at 19 times trailing earnings. That shows that even after the decline in the stock price, the market is expecting high growth rates over time as Yum capitalizes on its decision several years ago to focus on the Chinese market and other developing countries. Analyst consensus for 2014- after the company expects its business to be back on track- implies a forward P/E of 17. We’d say that this is a very bullish outlook, and certainly wouldn’t consider Yum a value stock at these levels. It might be best to wait out a few quarters and see how its recovery progresses.

While hedge funds and other notable investors were pulling out of Yum! Brands, Inc. during the third quarter of 2012, it still made our list of the most popular restaurant stocks among hedge funds (see the full top ten list). Billionaire Steve Cohen’s SAC Capital Advisors increased its stake by 55% during the quarter and closed September with 1.5 million shares in its portfolio (check out Cohen’s stock picks). Chilton Investment Company, which is managed by fellow billionaire Richard Chilton, cut its stake slightly but still reported a position of about 640,000 shares (find Chilton’s favorite stocks).

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