Taco Bell Thinks Outside The Bun, Focuses On Growing Outside The U.S.

Inspired by Taco Bell’s fresh focus on international markets, Credit Suisse analysts Jason West and Jordy Winslow came out of Thursday’s Investor Day more bullish on the Yum! Brands, Inc. YUM fast-food segment.

West and Winslow were particularly inspired by improvement to Taco Bell’s store-level profits, catalyzed by heightened global brand awareness and significant reduction to the cost of goods sold among international franchises.

Chalupas Go Global

“[Taco Bell] made the most compelling and realistic case for international unit growth acceleration we've heard in 10 years of covering YUM,” the analysts wrote in a Friday note.

Management announced expansions in Canada, Brazil, China and India, coupled with launches in dozens of other markets. With a five-year goal of operating 9,000 global restaurants, the brand expects to open more than 500 locations per year ━ well above its previous rate of about 200 and Credit Suisse’s two-year forecast of 300 to 400.

Meanwhile, management foresees strong momentum domestically despite an expected slip from last quarter’s 8-percent comp.

“Franchisee interest in unit development continues to grow, and there are multiple levers of comp growth in the pipeline,” West and Winslow wrote, noting new product platforms, remodels and delivery as potential catalysts. “Taco Bell may be the best-positioned name among the traditional QSR] QSR brands to capture market share in a challenged restaurant market in coming years.”

Taco Bell gleans nearly all of its profits from U.S. operations.

The Yum Readout

Credit Suisse considers the chain’s accelerated global expansion key to Yum valuation. As the chain represents about a third of the company’s profits, despite comprising about 15 percent of Yum’s global reach, the analysts consider it a “key growth leg in the Yum portfolio.”

The firm raised its price target from $75 to $78 to reflect expected earnings before interest, tax depreciation and amortization 17.8 times the 2018 estimate and on par with the rate of global franchise competitors.

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