Consumer discretionary

Yum! Brands, Inc. (YUM) Reiterated as Outperform, Cuts Estimates Ahead of Investor Day: RBC Capital

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Yum Brands reiterated as Outperform by RBC Capital

Analyst David Palmer at RBC Capital maintained his stock rating of Outperform for shares of Yum! Brands, Inc. (NYSE:YUM), along with a Price Target of $97.00 for the stock, which reflects an expectation of 10.68% from its current price level of $87.64.

The analyst reiterated his stock rating as he looks forward to hear about the new initiatives at the company’s investor day which is scheduled on October 11. Following a meager miss in its 2Q Earnings per Share (EPS), the analyst at RBC trimmed down his EPS estimates for 2016 as well as 2017 from $3.68 to $3.65, and from $4.14 to $4.18, respectively. The trimmed EPS estimates still reflect an upside potential of 15% and 13% on Year-over-Year (YoY) basis, respectively for 2016 and 2017.

The rationale for lowering the estimates is the lower level of Same Store Sales (SSS) in China, as it is recovering from the protests at the South China Sea, which could present a headwind of 4-5 percentage points, and this could be offset by the acceleration in the margins recaptured and stable to contribute towards improved momentum in KFC and Taco Bell divisions.

With new SSS forecasts of 0%, 3%, -1% and 2% in 4Q 2016 for China, KFC, Pizza Hut, and Taco Bell respectively, in comparison with its previous estimates of about 2% across all four divisions mentioned before.

Despite of such changes, the Price Target has remained intact at $97 by the analyst, on back of Sum of the Parts (SOTP) analysis, which presents a yield of $64 value originating from the New Yum, and $33 value originating from Yum China. Yum China is currently being valued at a multiple of around 10x of 2017 EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), which translates into a Price Earnings (P/E) multiple of 21x. Moreover, New Yum is currently valued at a multiple of 14x of its 2017 EV/EBITDA, which translates into a Price Earnings multiple of 23x.

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