Goldman Sachs Sees Structural Concerns Over Yum! Brands China Business

Karen Houlthouse of Goldman Sachs resumed coverage of Yum! Brands YUM on Monday with a Sell rating and $70 price target due to “structural” concerns over the company's China business.

“We believe the local competition will arrive more quickly [in China] than in tier one/tier two cities, limiting how long Yum Brands is able to earn excess returns,” Houlthouse wrote in a note. In addition, the analyst notes that the company is “consistently” missing its growth targets outside of China.

Houlthouse notes that comp and system sales growth targets have been missed for the past three years as developed markets (especially the U.S.) have been “larger underperformers."

According to Houlthouse, Taco Bell is a “bright spot” for Yum Brands, but it “should be brighter.” The analyst argues that Taco Bell should be performing at an above low-single-digit comp with so many things working in the brand's favor such as breakfast sales, a compelling value and social media strength.

Bottom line, Houlthouse points out that a substantial portfolio of executive compensation stems from unit growth, system sales growth and EBIT growth – many of which can be driven in the short-term with no corresponding return metric. The analyst notes that the company should place a greater emphasis on comp growth, restaurant margins and returns.