Yum Brands Cheering Over Expansion Despite Recent Pull Back

| About: Yum! Brands, (YUM)

While Yum Brands (NYSE:YUM) Y-U-M cheer was recently heard at the Yum Brands' investor update meeting held on December 6, 2012, investors in Yum's stock aren't too cheery of late, as the company's stock price has dropped precipitously over the last couple of weeks as shown below:

A large portion of the drop in stock price can be attributed to Yum's poor showing in China, which was considered as a possibility in this previous article. In the investor update meeting, the same-store sales slowdown in China was attributed somewhat to the overall macroeconomic environment in China.

In the short-term Yum may not look too cheery, but for the long-term, the company appears to be sitting in a nice position, as Yum is one of only two major competitors in its space in China, the other competitor being McDonald's (NYSE:MCD). Yum estimates the consumer class in China currently at 300 million people and projects the consumer class in China to double by 2020. Additionally, Yum expects the China market segment to support 30,000 casual dining restaurants by 2020, so the sky is the limit for Yum over the next few years in China. Yum noted it is starting to expand in the lower tier cities in China, which represents one billion people - that's a billion with a big B and with a big $B as well.

Yum is also starting to expend in India and plans to build at least 150 new units in the country in the next year. India also represents a billion people with a big B.

Yum's target is to deliver at least 10% EPS growth every year and has done so for the last ten year and expects to deliver 13% EPS growth this year. The company built a record number of new stores this year, and expects the new stores to begin to generate additional profits for the company in the next year.

Yum appears to have turned its Pizza Hut brand around, as the brand is now experiencing net unit growth for the first time in a decade. Yum attributes the turn-around for Pizza Hut to its new high return, lower cost delivery carryout model.

With the pull-back in Yum's stock price and its potential growth in China, this could be an opportune time to invest in the company, but with the volatility in China and the fiscal cliff on the horizon, an investor might want to invest with some protection. A protective investment to consider is a married put. A married put provides unlimited upside with limited downside, so if the company's stock price increases, the married put benefits, and if the stock price drops, the amount of pain suffered is limited. The married put can be entered by purchasing a put option against a long position in a stock. Typically, the expiration month for the married put is selected several months out in the future in order to reduce the per-day costs of the put "insurance".

Using PowerOptions, a variety of married put positions for Yum were found for expiration in July of 2013 as shown below:

The Yum married put using the 2013 July 70 put option looks attractive with a maximum potential loss of 6.2%. However, when considering expected dividend payments during the holding time, the maximum percent risk is reduced to 4.9%, so even if the price of the stock tanks, the maximum loss which can be sustained is 4.9%. The details for the Yum married put trade are shown below:

Yum Married Put Trade

  • Buy YUM stock (existing or purchased)
  • Buy 2013 YUM July 70 Put at $7.10

A profit/loss graph for one position of the Yum married put position is shown below:

For an increasing stock price, the value of the married put also increases, and for a stock price below the $70 strike price of the put option, the value of the married put remains unchanged. And, if the price of the stock increases to above the $70 strike price of the put option, then income methods can be applied in order to receive income and reduce risk as taught by RadioActiveTrading.com.

Looking forward to hearing your comments below!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.