Morningstar

Results a Mixed Bag, But Yum Brands Still Compelling

Both Yum China and the new Yum Brands are finding ways to drive impressive core operating profit gains.

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Yum Brands Inc
(YUM)

Ahead of the widely anticipated spin-off of Yum China later this month,

While favorable food costs and value-added tax changes in China played a role the profitability gains, we also see evidence that menu innovations, more comprehensive value/bundling efforts, improved store productivity metrics, and digital enhancements are helping Yum adapt to changing consumers views on value and convenience. We believe this bodes well for future sales trends--even factoring in limited near-term pricing opportunities in the U.S. amid industry promotional activity and deflationary food at home price trends--and helping to negate wage increases. In our view, this adds support to the brand intangible asset behind our wide moat rating while reinforcing both Yum Brands and Yum China as compelling longer-term cash flow stories.

There is no change to our $96 fair value, as the China and Pizza Hut top-line softness will be offset by the solid Taco Bell and KFC results and companywide margin gains. With management expecting China comps to remain positive for the balance of the quarter and expectations of continued momentum at KFC and Taco Bell, we find the updated core operating profit outlook realistic.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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