Cowen Boosts Yum Brands; Taco Bell Growth, Buyback Potential Excite

• Shares of Yum! Brands, Inc. YUM have dipped 19.52 percent over the past six months, declining almost to its 52-week low on November 12.
• Andrew M. Charles of Cowen and Company has upgraded the rating on the company from Market Perform to Outperform, while raising the price target from $77 to $88.
• With the company’s split imminent, Charles expects investors to increasingly focus on positives associated with Taco Bell, rather than the concerns related to China. The risk/reward profile is favorable at present.

Analyst Andrew Charles believes that while Yum Brands’ growing franchise mix is likely to lead to accelerated cash returns to shareholders, the “highly franchised business model provides stability that can more predictability return EPS to 10+ percent annual growth after three years of missing targets.”

Post-split, Charles believes that there would be increased focus on Taco Bell, given that this business has the “best comp and unit growth track record.” Also, while Yum Brands intends to derisk China, the near-term estimates for China appear achievable.

“We are most excited by the opportunity to use an estimated $1.5B in proceeds from refranchisings for share buybacks as Yum shifts from a 91 percent to 95 percent franchise mix outside of China,” Charles mentioned, adding that this could add $0.04 to the 2016 EPS and $0.13 to the 2017 EPS.

The EPS estimates for 4Q15, 2016 and 2017 have been raised from $0.70 to $0.71, from $3.60 to $3.73 and from $4.10 to $4.25, respectively.