Morningstar On Yum!'s Future: Better Second Half, Possible China Spinoff

Yum! Brands, Inc. YUM reported dismal second-quarter earnings on Tuesday, attributing it to continuing weakness in China. The company declared an EPS of $0.54, compared to EPS of $0.75 it reported for the same quarter last year.

RJ Hottovy, global director of consumer equity research at Morningstar, was on CNBC recently to weigh in on Yum! Brands' earnings.

A Recovery In Second Half

"I think the market was certainly looking for more on the China comp number," Hottovy began. "A negative TAN isn't great, but...four straight quarters, that means we are going to start lapping some of those negative numbers. And I think the second half is going to look much brighter.

"[The] company has done a good job on menu revamps and a number of other marketing efforts. So, I think, we are going to see that positive comp. They may not hit that 3 to 7 percent comp for the full year, but certainly we are starting to see signs that we could see a second-half recovery."

Related Link: Yum! Brands Posts Upbeat Q2 Profit, But Sales Miss Views

Reason For Stock Surging

He continued, "About stock performance, I think it's a combination of, one, anticipation that the China story will come back in the second half. But, we have also heard some activist chatter potentially pushing the company to spin off its China business at some point. I think that's what has been really driving the stock."

Spinning Off China Unit

Hottovy was asked if he thinks Yum! Brands should contemplate spinning off its China business. He replied, "I think it's an intriguing idea. I think that if you look at China itself, it's kind of a self-contained ecosystem where you have your own supply chain, your own distribution, your own real estate team, your own personnel development team. There really is its own self-contained ecosystem.

"So, breaking it off, you are really not going to sacrifice a ton of economy of scale. Also, it's a different franchise/company ownership mix than we have seen in other parts of world. So, you have different capital needs. This is one of those cases where a spinoff actually might make some sense, just so you have some different management teams focus on it," Hottovy concluded.