EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat Yum Brands Offers Investors Dual Global Growth and Capital-Allocation Investment Stories

Although we believe restaurant competition is on the rise worldwide, Yum Brands offers one of the more dynamic global consumer growth stories, even after the separation of Yum China as a trademark franchisee. Our optimism stems from a wide moat reflecting strong brand intangible assets in KFC, Pizza Hut, and Taco Bell, as well as a scalable franchise model. Under CEO Greg Creed's leadership, Yum remains focused on combining unit growth and same-store sales layers to drive systemwide sales, increasing operating leverage, and bolstering returns on capital, which should help it withstand emergent competition while adapting to evolving consumer preferences.While China has historically received much of Yum's focus from an investment standpoint, the separation transaction has allowed the market to focus on Yum's other regions, which have not received the level of credit they deserve from the market since moving to the brand organization structure in early 2014. In our view, the consolidation of the KFC, Pizza Hut, and Taco Bell brands at the global level has had a positive influence systemwide. In fact, we believe Yum Brands has developed into one of the top innovators in the quick-service restaurant space today, and we expect that new daypart expansion, mobile engagement, product development efforts, and a delivery partnership with GrubHub can continue to elevate systemwide sales growth. For Yum Brands, a longer-term algorithm calling for mid- to high-single-digit system sales growth--specifically, "a target of 7% system sales growth"--and high-single-digit EBITDA and operating profit growth is directionally aligned with our medium-term DCF assumptions, owing to same-store sales levers such as value platforms, digital ordering, and delivery; greater use of alternative restaurant formats; a move to 98% franchise ownership at the end of 2018; reducing G&A to 1.7% of system sales by the end of 2019; and reducing annual capital expenditure to $125 million by 2019 (versus $234 million last year). In our view, goals of 15% total returns (EPS growth plus a post-separation dividend yield around 3%) for Yum Brands are aligned with our model through 2021.