Break Up Analysis Of Yum! Provides 'Material Upside,' But Credit Suisse Maintains Underperform

• Shares of Yum! Brands, Inc. YUM have risen 10.56 percent year to date.
• Jason West of Credit Suisse has maintained an Underperform rating and price target of $86 on the company.
• Although the risk/reward profile of the stock is currently favorable, West expressed concern regarding the company’s “continued aggressive store growth in China.”

According to the Credit Suisse report, the aggressive expansion in China would worsen the underlying challenges already existing in that market, driven by various food safety issues, intensifying competition, slowing macro growth and limited price inflation.

Although West believes that the management would be resistant to “to pursuing the leveraged buyback and China break-up strategies that have been proposed by activist investors wards the China,” the absence of this catalyst would drive the stock to lag its less China exposed restaurant peers.

According to the report, a base case scenario in the event of a leveraged break-up suggests that the stock valuation could go up to $95 per share.

The EPS estimates for 2015 and 2016 have been lowered to reflect a weaker yuan. “While we are still concerned about the pace of recovery in China, our model had already factored in a more muted outlook for China relative to consensus, so we have not trimmed underlying SSS or margin assumptions,” West added.