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Yum Brands, Inc. (YUM) and VeriFone Systems, Inc. (PAY) are two companies showing positive signs for improvements. Both stocks had received positive calls from the analysts, including the PT increases for YUM and analyst's upgrade for PAY. Both stocks will be analyzed fundamentally and technically. Investing strategies will also be reviewed.

Yum Brands, Inc.

YUM is a quick service restaurant company based on a number of system units, including KFC, Pizza Hut, and Taco Bell. YUM was up 1.31% and closed at $68.73 on March 12, 2013. YUM had been trading in the range of $59.68-$74.75 in the past 52 weeks. YUM has a market cap of $30.98B with a beta of 0.83.

As reported by Fox Business, YUM estimated same-store sales tumbled 24% in its KFC China division during Q1, which includes only the two months of January and February. The company's Pizza Hut chain of restaurants suffered a preliminary same-store sales decline of just 2%. Overall, same-store sales slumped 20%, beating the company's forecast for a drop of 25%.

On March 12, 2013, Goldman Sachs maintained a neutral rating on YUM and raised its price target to $65.00 (from $63.00). Adjusted for the new year shift, YUM's China same-store-sales declined 13 percent in February compared to a decline of 22 percent in January. In the view of analysts, the improvement signals the worst is behind YUM's in China. The analyst, Michael Kelter, said,

The improvement in underlying trend suggests that the acute phase of YUM's recent chicken PR issue is finally behind it. The focus now is on the length of time before trends return to positive; until that time the P&L is under a significant amount of stress from China fixed cost de-leverage.

Deutsche Bank also maintained its hold rating on YUM and increased the price target to $68 (from $62). Lastly, Oppenheimer reiterated its rating of outperform for YUM and changed its price target to $77 (from $70). Analysts currently have a mean target price of $67.67 and a median target price of $67 for YUM. Analysts, on average, are estimating an EPS of $0.59 with revenue of $3.05B for the current quarter ending in June, 2013. For 2013, analysts are projecting an EPS of $3.09 with revenue of $13.77B, which is 1.00% higher than 2012.

There are a few positive factors for YUM:

  • Higher revenue growth (3-year average) of 8.0 (vs. the industry average of 4.4)
  • Higher net margin of 11.7% (vs. the industry average of 10.6)
  • Stronger ROE of 80.3 (vs. the industry average of 32.1)
  • Lower P/E of 20.1 (vs. the industry average of 21.9)
  • YUM generates an operating cash flow of $2.29B with a levered free cash flow of $910.25M
  • YUM currently offers an annual dividend yield of 1.95%

Technically, the MACD (12, 26, 9) is showing a bullish trend and the MACD difference continues to diverge. The momentum indicator, RSI (14), is increasing and indicating a strong buying momentum at 69.25. YUM is currently trading above its 50-day MA of $65.47 and 200-day MA of $66.31, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

With strong cash flow and ROE, there is still more upside potential as YUM continues to recover from the chicken issue. For bullish investors, a credit put option spread of July 20, 2013 $60/$65 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire YUM stock at a price below $65 upon options expiration. Investors can also review the following ETFs to gain exposure to YUM:

  • Dynamic Leisure & Entertainment Portfolio (PEJ), 4.86% weighting
  • Large-Cap Growth Equity Strategy Fund (RWG), 3.25% weighting

VeriFone Systems, Inc.

VeriFone Systems, Inc. engages in the secure electronic payment solutions. PAY was up 5.96% and closed at $21.68 on March 12, 2013. PAY had been trading in the range of $17.93-$55.89 in the past 52 weeks. PAY has a market cap of $2.34B with a beta of 1.95.

On March 6, 2013, PAY reported a mixed Q1, 2013 result. The earnings of 40 cents surpassed the Zacks Consensus Estimate by 3 cents. However, PAY's revenues of $429.7M missed the Zacks Consensus Estimate of $460.0M. As quoted from the report,

The miss was primarily due to soft macroeconomic conditions in Europe, currency headwinds in Venezuela (usually a strong market for VeriFone), postponement and delay of certain projects, particularly in Asia; the cancellation of the Washington D.C. taxi project and certain internal execution challenges.

On March 12, 2013, PAY announced that Douglas G. Bergeron is stepping down as Chief Executive Officer and member of the Board of Directors, effective March 12. Analyst Gil Luria of Wedbush called the depart a "necessary condition of success". Luria said,

We believe the new CEO and new CFO Marc Rothman will need to repair the damage their predecessors have left behind, which could lead to further negative developments for the company and the shares over the next few months/quarters.

On March 12, 2013, Susquehanna upgraded PAY from neutral to positive. Analysts currently have a mean target price of $22.79 and a median target price of $23.50 for PAY. For 2013, analysts, on average, are estimating an EPS of $2.04 with revenue of $1.81B, which is 4.00% less than 2012.

There are a few positive factors for PAY:

  • Higher revenue growth (3-year average) of 30.2 (vs. the industry average of 2.5)
  • PAY generates an operating cash flow of $239.23M with a levered free cash flow of $460.95

Technically, the MACD (12, 26, 9) indicator had just turned bullish in the last trading day. RSI (14) is moving out of the over-sold territory and is picking up at 37.31. PAY is currently trading below its 50-day MA of $29.20 and 200-day MA of $31.75, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

PAY suffered a big drop in late February due to lowered guidance. The share price had started to stabilize since then. The new CEO has a big task to turn around and put the company back to the right track to resume its growth. By lowering the bottom line expectation, this stock has much more upside potential as the company improves. This stock is becoming bullish in the short term, technically. For bullish investors, a credit put option spread of July 20, 2013 $18/$20 put can be reviewed.

Note: All prices are quoted from the closing of March12, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: 2 Recovering Stocks With More Upside Potential: Yum Brands And VeriFone