#$nus

The share price chart of Yum! Brands is shown above.

The writing was on the wall. We warned about the impending collapse in Yum! Brands’ (YUM) shares in our highly-selective July 14 note, “Warning! 5 Heavily-Followed Dividend-Paying Stocks to Avoid:”

"The owner of KFC, Pizza Hut and Taco Bell has a solid franchise, but its share price has rocketed too far too fast, perhaps on renewed speculation that it will spin off its Yum! China division into a separate entity, which may never happen. But while speculation fuels the share price advance, there are a few things we do know for certain. The fast-food environment in the US is cutthroat, and the trend toward fast-casual is a long-term secular dynamic, meaning recent progress by KFC and Taco Bell in the US market, albeit noteworthy, may not hold permanently. The firm’s KFC brand is perhaps the best restaurant growth story in China and India, and its growth ambitions may pan out as planned, but such a dynamic is certainly not unknown, and from our perspective, it has been more-than-factored into the stock price. At more than 25 times present-year earnings, Yum! Brands is certainly not connected to its fundamental dynamics. With Chinese equity markets collapsing, the implications on consumer spending in the country, the most valuable one for Yum! Brands, cannot be ignored. We don’t like the risk-reward."

On October 7, the restaurant giant surprised the market with its third-quarter results for the period ended September 5. Though sales in the company’s China Division sales advanced 8% in the period, the meager pace of same-store sales (2%) in the country was far worse than expected, especially for a company that should be bouncing back from recurring problems associated with bird flu scares and sourcing scandals in the country. Noting that same-store sales in China would come in at a mid-single-digit pace during the fourth quarter, with unusual but material weakness coming from Pizza Hut Casual Dining in the country, management now expects full-year earnings per share to advance at a low-single-digit pace, below previous expectations calling for a double-digit ramp. We had thought if faced with operational adversity, management could use share buybacks as a way to stem the earnings-per-share decline, but it now seems that things may be far worse operationally than even management can reasonably forecast.

Multinationals leveraged to consumer spending in China are only starting to feel the residual impact from the collapse in China’s equity market, in our view. Nu Skin (NUS), which develops and distributes personal care items and nutritional supplements, noted it is experiencing a direct impact from “economic conditions in China,” to explain why the company experienced “lower-than-expected sales” of its new cosmetic oils in the country during August and September. We now believe that Nike’s (NKE) fantastic performance in China for an overlapping period, ending August 31, may now mean that the firm is just weathering the macroeconomic storm far better. The shoe giant’s ‘futures’ orders had capped some concerns about consumer spending in the country when it reported a couple weeks ago, but Yum! Brands’ and Nu Skin’s quarterly updates have put those concerns right back on the table for investors.

What to do about Yum! Brands?

For starters, shares are no longer as “bubbly” as they once were, but they aren’t necessarily cheap either. Our fair value estimate had been in the low-$70s prior to the quarterly release and with the company’s equity now dropping to the high-$60s, there’s still not much of a margin of safety. Second, the collapse in the share price suggests an immediate snap-back may not be in the cards, even if we see some buying tomorrow and into the following weeks. Portfolio managers are moving out of shares.

To put it bluntly, our fundamental and valuation thesis on Yum! Brands has played out, and we wouldn’t be interested in shares until an adequate margin of safety presents itself on strengthening market conviction in the business (strong pricing momentum). That Yum! Brands may break apart its business is only a catalyst for the headlines. Our intrinsic value process already captures the free cash flow generation from each aspect of its business. We think the speculative euphoria regarding a potential split-up is what got investors in trouble in the first place.

A slowdown in consumer spending in China across the restaurant universe will have implications on McDonald’s (MCD) and Starbucks (SBUX) as well, even as the former seeks to cushion the blow with all-day breakfast initiatives and the latter masks any impact with pure unit growth. At nearly 20 times and 30+ times fiscal 2016 earnings, respectively, the risk to their share prices is to the downside. Any upside surprise may be met with selling pressure on valuation concerns, even as shares of McDonald’s seek to break to new highs.

BABA - Shares higher by 12% in the pre on stronger revenue and EPS beat.

ANN - Shares up nearly 7% on reports that Golden Gate Capital will acquire company.

CSIQ - Canadian Solar KRUSHED EPS forecasts by 37 cents on stronger revenues, shares higher by 2% here.

MT - ArcelorMittal down nearly 5% after MASSIVE EPS miss (38 cents)

NUS - Nu Skin missed EPS forecasts on weaker revenues & lowered guidance, shares down over 18%.

QRVO The  provider of core technologies and radio frequency (RF) solutions for mobile, infrastructure, and aerospace beat top and bottom lines and raised guidance, shares higher by 12% in the pre.

TRIP - Tripadvisor missed EPS forecasts on inline revenues, shares higher, that's right HIGHER by 4% in the pre.

…global stocks mostly lower this week, as weak global growth remains underlying story (outside of the U.S.), as economic data has not been supportive of recent market upward action in Europe (Germany record high last week), and Asia (China up over 30% last few months), as Central Bank intervention remains the key (and lone) driver for these markets (equity markets today ended on the lows, with selling pressure about the whole day).

Nu Skin Enterprises Inc. (NUS) is set to report FQ4 2013 earnings before the market opens on Monday, March 3rd. Nu Skin is a multi-level marketing company which sells personal care and dietary supplement products. In January NUS share prices got rocked and plummeted from $136.47 to $79.47 over 3 days as the Chinese government announced it would investigate allegations that Nu Skin was operating as an illegal pyramid scheme. Over the past 12 months Nu Skin’s growth has been red hot, especially in China. This quarter Wall Street is expecting Nu Skin to report 83% revenue growth compared to FQ4 last year. If Nu Skin can continue its massive growth and remain resilient in the face of fraud allegations, it could be one of the highest flyers of 2014. Here’s what investors are expecting from Nu Skin Monday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see Estimates and Interactive Features for Nu Skin)

The current Wall Street consensus expectation is for NUS to report $1.97 EPS and $1.075B revenue while the current Estimize.com consensus from Buy Side and Independent contributing analysts is $1.95 EPS and $1.058B in revenue. This quarter the buy-side as represented by the Estimize.com community is expecting Nu Skin to miss the Wall Street consnesus on both EPS and revenue.

Over the previous 5 quarters for which there is data the consensus from Estimize.com has been more accurate than Wall Street in predicting Nu Skin's EPS and revenue 3 and 4 times respectively. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market’s actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing an average differential between the two groups.

The distribution of estimates published by analysts on the Estimize.com platform range from $1.68 to $2.02 EPS and $1.020B to $1.082B in revenues. This quarter we’re seeing a wide distribution of estimates for Nu Skin.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signaling less agreement in the market, which could mean greater volatility post earnings. The allegations floating around about Nu Skin are likely a catalyst for the uncertainty.

Over the past 4 months the Wall Street EPS consensus increased from $1.92 to $1.97 while the Estimize consensus rose from $1.89 to $1.95. Over the same period of time the Wall Street revenue consensus surged from $1.043B to $1.075B while the Estimize consensus pushed higher from $1.052B to $1.058B. Timeliness is correlated with accuracy and upward analyst revisions at the end of a quarter are often a bullish indicator.

The analyst with the highest estimate confidence rating this quarter is WallStreetBean who projects $2.01 EPS and $1.082B in revenue. WallStreetBean touts an impressive record this season of being more accurate than Wall Street 60% of the time on EPS and 50% of the time on revenue. In the Winter 2014 season WallStreetBean is rated as the 21st best analyst and is ranked 10th overall among over 3,950 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case WallStreetBean is making a bullish call expecting Nu Skin to beat both the Estimize and Wall Street consensuses on EPS and revenue.

Contributing analysts on the Estimize.com platform have set the bar lower than Wall Street has this quarter. Allegations of pyramid scheme may hurt the multi level marketing company's ability to sign on new distributors and may result in less than expected revenue. The key for Nu Skin will be to continue its absurd rate of growth while fending off the thus far unsubstantiated claims of fraud.