On Monday, the Fast Money pros were trying to figure out if gains in Yum! were really warranted, especially the 2% spike in the after market.
Earnings were certainly bullish; no question there. The owner of the Pizza Hut, Taco Bell and KFC chains says its fourth-quarter profit rose 30 percent.
But the Fast Money traders expressed concern, largely because of the steep multiple at which Yum already trades.
“At 20 times forward earnings, you have to ask yourself at what level do investors stop paying this kind of premium,” says trader Guy Adami. “By contrast McDonald’s trades around 15 times forward earnings.”
Why is the market will to pay a greater premium for Yum! than McDonald’s .
Emerging markets trader Tim Seymour thinks the valuations are all about Yum!’s presence overseas. “75% of revenue will come from international business by 2015 – and China will be 50% of business in 2012,” he says.
“They’re doing more business in existing places and they’re opening new spots that are more profitable. That’s what I think the market is weighing.” In other words, he thinks the higher multiple may be warranted.
How will you know if the market embraces the valuation?
In the near-term trader Joe Terranova says watch $64.76, the 52-week high. If the stock stays above that level in Tuesday’s trade he’s consider it a bull sign.
Guy Adami is also optimistic. “At some point we hit the valuation wall – but I don’t think we’re there yet.”
Looking at the numbers a little more closely, the company earned $356 million, or 75 cents per share, for the quarter. That's compared to $274 million, or 56 cents per share, a year earlier. Revenue rose 15 percent to $4.1 billion.
Analysts expected profit of 74 cents per share on revenue of $4.04 billion
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Trader disclosure: On Feb 6, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Terranova is long GOOG; Terranova is long JOY; Terranova is long TRLG; Terranova is long AXP; Terranova is long MUB; Terranova is long LQD; Terranova is long SBUX; Terranova is long CNX; Terranova is long SU; Terranova is long OXY; Terranova is long MA; Terranova is long MCD; Terranova is long SNDK; Terranova is long EMC; Terranova is long IBM; Terranova is long VRTS; Seymour is long AAPL; Seymour is long BAC; Seymour is long INTC; Seymour is long YHOO; Adami owns C; Adami owns GS; Adami owns MSFT; Adami owns AGU; Adami owns NUE; Adami owns INTC; Adami owns BTU; Kelly is long TLT; Kelly is long SPY calls; Kelly is long SPY puts; Nations is long SPY; Nations is long BAC; Nations is long C
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