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Why These 2 Stocks Sank on Wednesday

By Eric Volkman - Updated Oct 30, 2019 at 9:24PM

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For this pair of decliners, the day was all about earnings.

Although no investor should buy or sell exclusively on the basis of a stock's latest quarterly earnings report, these results matter. Looking at and behind the numbers can reveal crucial strengths or weaknesses in a company's business model, and provide clues as to its future prospects.

With that firmly in mind, let's take a look at two top stocks that got rocked on Wednesday due in great part to their earnings releases. What do their respective performances indicate about their worth as investments?

The exterior of a KFC restaurant at night.

Image source: KFC (Yum! Brands).

Yum! Brands

Yum! Brands (YUM -0.86%) stock closed down nearly 6% on the day. The company's bottom line came up well short of expectations thanks largely to one of the chain restaurant operator's recent investments.

For its Q3 of fiscal 2019, the operator of Taco Bell, Pizza Hut, and KFC restaurants posted revenue of $1.34 billion, down but not significantly so from the $1.39 billion it earned in the same quarter of 2018, and basically in line with the average analyst estimate. Same-restaurant sales rose by 3%, a shade below the 3.3% expected by prognosticators.

In terms of GAAP profit, Yum! Brands netted $255 million ($0.81 per share). This fell well short of both the year-ago result ($454 million) and analyst expectations of $0.96.

The gap between this and last Q3's net profit is due in no small part to the company's investment in troubled meal delivery service Grubhub (GRUB). During the quarter, Yum! Brands absorbed a $60 million pre-tax hit from this involvement.

This is compounded by the uncomfortable coincidence of Grubhub reporting Q3 earnings just before Yum! Brands. To put it mildly, Grubhub's performance was not inspiring: Revenue growth is slowing, and the company's headline numbers failed to meet analyst projections. Guidance was also weak.

That was a troubling development for a Grubhub stakeholder like Yum! Brands. No investor likes an underperforming asset dragging down one of his or her companies.

In my opinion, Yum! Brands has done a decent job keeping most of its brands on a modest growth path, no mean feat considering that traditional fast food isn't in fashion (at least among American consumers).

Still, while I don't think investors should get stuck on the Grubhub sob story, I don't find Yum! Brands to be loaded with great potential. I'd leave the stock alone for now.

Public Storage

Specialty real estate investment trust (REIT) Public Storage (PSA 0.16%) -- operator of the namesake storage facilities sprinkled throughout the U.S. -- saw its stock decline by almost 5% on Wednesday.

Yes, the big catalyst was earnings. In Public Storage's Q3 of fiscal 2019, revenue crept up by 3% to reach just over $729 million. "Core," i.e., adjusted, funds from operations (the key profitability metric for REITs) came in at $2.73. That was slightly up from the Q3 2018 result of $2.70.

According to Zacks Investment Research, neither figure met analyst expectations. These were for nearly $733 million on the top line and $2.74 in per-share core FFO.

The slip in FFO is due to a bit of a spike in expenses for Public Storage's same-store facilities, which it defines as those "owned and operated on a stabilized level of occupancy, revenues and cost of operations since January 1, 2017." These expenses rose by more than 6%, due mostly to higher marketing costs; a bump in property taxes also took a bite.

Since Public Storage is quite a visible REIT, with its company name prominently displayed on its numerous facilities in American cities, it has the scope to curb marketing expenses if and when it desires. In the interest of lifting FFO, I think it'll find a way to do so.

Meanwhile, I'm encouraged by the company's constant efforts to expand -- it acquired 10 new properties during the quarter -- and its ability to grow revenue and FFO. It doesn't pay the highest-yielding dividend among REITs, but the distribution is steady and reliable, and Public Storage has raised it many times over the company's history. I think this stock is a buy.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Grubhub. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
YUM
$116.94 (-0.86%) $-1.01
Public Storage Stock Quote
Public Storage
PSA
$353.43 (0.16%) $0.58
GrubHub Inc. Stock Quote
GrubHub Inc.
GRUB

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