EUR 850.00 For Business Accounts Only

Morningstar | Yum Caps Off Foundational 2018 Better Positioned to Accelerate Comp and Net Unit Momentum Systemwide

Wide-moat Yum Brands' strong finish to 2018 reinforces our positive long-term outlook while reaffirming its position as one of the most dynamic operators in a rapidly evolving restaurant industry. While each of its brands is at a different stage with their strategic priorities, we believe Yum personifies what a modern QSR franchisor should look like. Taco Bell (comps up 6%) continues to outpace the category by using differentiated marketing and striking a balance between everyday value, bundling, and limited time offers, and there are signs that KFC (comps up 3%) is making similar progress. With Taco Bell now offering nationwide delivery through GrubHub (and KFC on track to do the same by year-end) and KFC expected to have click-and-collect kiosks in 5,000 restaurants by 2020, Yum is one of the industry leaders with respect to convenience innovation, which should make 2019 comp guidance of 2%-3% achievable. Pizza Hut remains a work in progress (flat comps), but we're encouraged by the brand's ongoing transition from dine-in to delivery-focused.

We also share management's views that unit development is becoming a more important part of the Yum investment thesis. Backed by strong master franchisee partners (including Telepizza in Latin America), we see 4% new unit growth as a reasonable goal for 2019, with the potential to add 15,000 net new units the next 10 years (implying 63,000 units by 2028).

We're planning to raise our $90 fair value estimate by a few dollars due to more optimistic near-term comps at Taco Bell (5% in 2019) and KFC (3%-4%) due to expanded delivery capabilities. Yum's 2019 implied system sales growth of 6%-7% strikes us as reasonable if not slightly conservative, as does expectations calling for double-digit core operating profit growth (which is ahead of longer-term target in the high-single-digits but reflects the wind down of certain Pizza Hut and KFC transformation expenses, a recovery in KFC U.K., and G&A savings) and EPS of $3.75.

We remain comfortable with our five-year targets, including average annual system sales growth of close to 7% and core operating margin growth in the high single digits to low double digits. While we see shares as fairly valued, we still view Yum as a core holding offering a balance between global growth and capital allocation (with $5.2 billion in cash returned to shareholders the past two years through share repurchases and dividends, Yum appears on track to meet or exceed its 2017-19 cash return goal of $6.5 billion-$7.0 billion remains).