Yum!: Sell Calls Against Stock to Pad Yield -- Barron's

| About: Yum! Brands, (YUM)
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Yum by Kopin Tan

Highlighted companies: Yum! Brands Inc. (NYSE:YUM), McDonald's Corp. (NYSE:MCD), Chipotle Mexican Grill Inc. (NYSE:CMG), Starbucks Corp. (NASDAQ:SBUX)
Summary: Shares of Yum! Brands Inc. (YUM), which owns KFC, Pizza Hut, Taco Bell, A&W and Long John Silver's, have soared 43% since Aug. 1, more than twice the average of other restaurant stocks and 4x the S&P 500. Up its sleeve: A new KFC logo (with a trimmer colonel), a resuscitated Taco Bell, and plans to turn around a "flat" Pizza Hut chain including a co-branding scheme to sell WingStreet wings together with Yum! Brands Chart 26 11 06pizzas. But it's YUM's China foray that has investors buzzing, with 22% projected growth (compared to 10% worldwide and 5% domestic) Yum has 3x McDonald's Corp.'s (MCD) presence in China. But in the short-term YUM may have a hard time producing numbers that can "wow" the Street, having already touted its China growth (which still only accounts for 24% of its 2007 projected revenues) in a September analyst meeting, and the Pizza Hut turnaround presently a long-term project. It is already at 20x earnings -- the top of its range. Given the poor odds for a short-term surge to the upside, and how expensive YUM options are, GS strategist John Marshall suggests selling out-of-the-money calls against the stock to pad yield.
Related: Are Yum!'s China Margins Sustainable?Yum!'s Quarterly Call Focuses on KFC, Pizza Hut & New Businesses in ChinaYum! Localizes China Fast Food StrategyJim Cramer's Take on YUMYum! Brands F3Q06 (Qtr End 9/9/06) Earnings Call Transcript