Saturday, November 16, 2013

Being Yum'mmed !!!

Tracking the order flow in YUM brands

We all are aware of YUM brands, the company which own & operates 3 major fast food chains KFC, Pizza Hut & Taco Bell.  If you want to dig more about this company you should check out the link below

Lately this company has been in news due to slumping sales in China, which contributes almost 40 % to its operating income. Slowing sales can potentially be the result of increased health concerns regarding poultry supply in China and outbreak of Avian flu.

It’s not any analyst report which sparked my attention on YUM, rather a very huge of option trade which went through yesterday (Nov 15th, 2013) got my attention and made me dig further into it. Part of my home work before trading this name, involves investigating how much growth market is expecting in this company’s stock price. Reverse engineering a DCF model revealed, market is expecting 34.70% growth in operating income over the next 5 years.  Price of current assets in place is only $20.90 and future growth should add $36.50, which puts the enterprise value close to $57.39. Last closing price I checked up was $73.98 – 29% more than enterprise value.   This seems to align well with discussion related to expensive multiple for markets which everybody is discussing these days!!  We‘ll see that later

Second leg of my analysis involves technical review of YUM to understand how it has been behaving lately.

Chart from Think or Swim Platform
Stock has been range bound since April 2012, with 75 ish being the upper bound and 60’ ish level – lower bound.  Long term trend from March 09 lows has been broken and stock is consolidating and even short term trend from earlier this year seem to following the same path as well.

Third leg of my analysis (most crucial to me) - How the implied vol and realized vol have been doing lately. No surprise that with the stock close to all time highs, implied vol currently is at 22th percentile. 30 day historical vol has ranged between 10.9% & 44.4% for the last 4 years and currently is at 28.5%.  I believe current 30 day realized vol still has the movement from earnings release captured and should decline shortly as earning move of 7.25% is priced out of it.

Chart from LiveVol Pro

Here’s a snap shot from order flow from Nov 15th

Someone structured a big bearish position on this name or is trying to hedge an existing stock position by locking in the gains below 65.  Order flow raised IV for Dec 65’s by 5 points and Jan 65 ‘by 2 points – creating vol difference between the two expiries.  Dec/ Jan Calendar makes perfect sense if you feel  this stock has seen it s high for now and is due for a trip south.

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