JPMorgan Analysts Suggest Accumulating Yum Brands Shares In Mid-$80 Range

Yum! Brands, Inc. YUM 2Q16 results indicate a China beat, while performances by other segments came in-line with or lower than expectations, JPMorgan’s John Ivankoe said in a report. He maintained an Overweight rating on the company, while raising the price target from $90 to $97.

China Beat

Consolidated comps were lackluster, albeit better than expected. Margins drove the story, with COGS at 29.6 percent, hitting a historically low level. Overall store margins came in at 15.7 percent, versus the JPM estimate of 13.0 percent and representing a 110bps improvement y/y, despite flat comps. Analyst John Ivankoe raised the restaurant margin estimate for F16 from 16 percent to +17 percent.

Related Link: Wells Fargo Sees YUM!'s Q2 EPS Above Street

“On the surface it seems continued control of labor and running record high gross margins may constrain future sales recovery and competitiveness in an endlessly evolving marketplace,” Ivankoe wrote. He added, however, that new unit AWS was very poor in 1H16 and management should address these trends, especially since multi-year comp trends remain negative.

Other Segments

KFC comps came in-line with expectations, while PH comps and store margins were lower. Taco Bell recorded its first negative comp since 1Q14, and missed already-lowered expectations.

“Our earlier suggestion to accumulate shares in the low $80s now looks too conservative and we now believe mid-to-high $80s will allow a favorable risk/reward entry point relative to our $97 target,” the analyst commented.
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