RBC Downgrades Yum!, Says Stock Is No Longer A 'Top Pick'

Shares of Yum! Brands, Inc. YUM have gained ~24 percent year-to-date. RBC Capital Markets’ David Palmer downgraded the rating on the company from Top Pick to Outperform, while maintaining the price target at $97.

Shares of Yum! Have outperformed the S&P 500 year-to-date by 17pp and “our coverage universe” by 27pp, analyst Palmer noted. He added, however, that the stock continued to represent “compelling long-term value that compares favorably to its peers on several fundamental and valuation metrics.”

Upside Scenario

While the price target was based on a $63 per share value for the New Yum and a $34 per share value for Yum China, there could be upside in case initial guidance proved conservative, Palmer mentioned. He enumerated two major potential areas of upside:

• Yum China continues brand recovery in KFC and Pizza Hut
• The new Yum Brands continues to generate higher FCF and accelerating revenue growth, through refranchising, new franchising deals, improved Pizza Hut marketing and G&A reductions

Performance Of The Brands

While the recent trends suggest a robust performance by Taco Bell and KFC, the Pizza Hut chain could do with improved marketing. The SSS estimates for Q3 are at 2 percent for both Taco Bell and KFC, and at -1 percent for Pizza Hut. The analyst mentioned the reasons as Pizza Hut having “drifted away from its $5 flavor value offering while pushing less effective LTO’s” and likely losing “even more momentum to Domino’s.”

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