Two-Thirds Of Yum's Business Saw Improvement In Q3, But Weak China Results Weighing On Shares

Wells Fargo remains on the sidelines on Yum! Brands, Inc. YUM as the company's improved profit forecast for the year was offset by a negative China same-store sales surprise ahead of the spin, leading to 2 percent drop in shares.

Yum reported third quarter operating EPS of $1.09, a penny below the Street estimate, hurt by weaker-than-expected China same-store sales.

"While the 3Q results will have no impact on the timing of the China division spin, we expect that the choppy sales trends could create pressure on the stock in the near term as investors wrestle with the proper multiple to place on a China business that has strong long-term development potential, but also a history of volatile operating results," analyst Jeff Farmer wrote in a note.

Related Link: For Yum Brands, Pizza Hut Disappoints While KFC And Taco Bell Shine

On the positive side, two-thirds of YUM's U.S. business saw improvement and the company modestly raised its 2016 core operating profit growth forecast to "at least 15%" from the prior "at least 14%."

Yum saw strong sequential improvement inTaco Bell same-store sales and KFC US.

Notably, the U.S. improvement comes despite a more competitive backdrop and indicates that the U.S. quick-service consumer is still spending at a healthy clip.

However, to reflect weak China business, Farmer cut his 2016 EPS view to $3.66 from $3.70 and 2017 EPS forecast to $4.12 from $4.17.
Farmer has a Market Perform rating, with a valuation range of $85 -$89.

"We believe YUM's current valuation is appropriately discounting what we view as a prolonged/low visibility China segment SSS and EBITDA recovery and an expectation for a continued relative SSS underperformance for the YUM-ex China segments," Farmer added.

At time of writing, shares of Yum Brands fell 1.59 percent to $87.21.