Goldman Sees Yum's Conservative Tone On China As 'Appropriate, Accurate'

Yum! Brands, Inc. YUM projected continued uncertainty in China. Goldman Sachs’ Karen Holthouse maintained a Sell rating for the company, while raising the price target from $66 to $70. The analyst commented that while investor focus is on Yum’s conservative guidance, the cautious tone on China seems “appropriate and accurate.”

China Top-line

“The company expressed extreme caution about carrying the benefit of a NY promo forward; 2QTD is negative; and when Pizza Hut will turn remains uncertain,” analyst Karen Holthouse wrote. She added that the uncertain tone seems appropriate, in view of the performance over the last few years.

Unit Economies

Yum has a greater mix of Pizza Hut, which is facing a weaker comp, which “helps explain the apparently growing gap between AWS and comps + FX,” Holthouse said. She added, however, that the approach of “if we build it, they will come” in infrastructure development seemed concerning, given the sales and macro uncertainty.

Taco Bell

Although Taco Bell has among “the more flexible menus for engineering value,” its strong initial value position puts it at greater risk in case competitive pressures continue, the analyst mentioned.

Pizza Hut

While Pizza Hut seemed to be improving, it requires investments in the long term. Holthouse explained, “1Q momentum was likely helped by ad spend (which may not continue through the year), while other companies have shown that developing digital capabilities requires often under-modeled investments.”

Estimate Changes

The EPS estimates for 2016, 2017 and 2018 have been raised from $3.59 to $3.87, from $3.85 to $4.08 and from $4.26 to $4.51, respectively, to reflect “pulled forward cost cuts/stronger China store margins,” the Goldman Sachs report noted.