Credit Suisse Upgrades Yum! Away From Underperform Following Q3 Results

• The share price of Yum! Brands, Inc. YUM has declined 24.67 percent in the last three months, touching a low of $67.71 on October 7.
• Jason West of Credit Suisse has upgraded the rating on the company from Underperform to Neutral, while lowering the price target from $86 to $75.
• West believes that the significant miss in the 3Q results would increase pressure on Yum! Brands to spin off its China business. The separation of the China business and the resultant value creation could lead to stock upside.

Analyst Jason West believes that “investors would prefer the option of owning the YUM of their choosing: either 1) a high-return and high cash flow, but slower growth, franchise biz or 2) a higher risk/reward China growth story.”

In addition, following the correction of about 19 percent on October 7, the stock is now cheaper. This implies that the market is no longer pricing in robust growth in China.

The 3Q miss has led to concerns about Yum! Brands’ China business, associated with higher than anticipated competition, the unexpected slowdown in Pizza Hut, increased store closures and the ongoing macro weakness.

“While YUM expects China SSS to be +mid-single digits in 4Q15, we believe compares get much tougher through the quarter and into 2016, meaning SSS could feasibly turn negative again in the near future,” West stated.

Although the management appears more open to the idea of separating the China business, they also appear to be focused on maintaining the current leverage position and corporate structure. Therefore, West believes that a spin off could be some months away.

The EPS estimates for 2015 and 2016 have been lowered.