EUR 850.00 For Business Accounts Only

Morningstar | Yum Carries Recent Momentum Into 2019, Reinforces Compelling Long-Term Growth Story

Wide-moat Yum Brands' 2019 started off where 2018 ended, with momentum across the KFC and Taco Bell brands and Pizza Hut showing signs of progress. We continue to view Yum as one of the best examples of how a multibrand quick-service restaurant company should operate amid rapidly evolving industry conditions. While the market also recognizes this--the stock trades above our $95 fair value estimate, which we plan to ratchet up by a few dollars to account for the more optimistic top-line results-- we would encourage investors to keep this name on their radar for any undue pullbacks. We remain comfortable with our five-year annual targets of 5%-6% system sales growth, 8%-9% core operating profit growth (implying almost 40% margins by 2023), and midteens total returns (EPS growth plus dividends).

While partly telegraphed by KFC China's strong results earlier this week, we believe the acceleration in KFC comps (5% versus 3% last quarter, with an uptick both in the U.S. and international) was the highlight of the quarter. There was some benefit from lapping last year's distribution issues in the U.K., but it's clear that KFC's four-pronged strategy of value/bundle offers, product innovation/limited-time offers, expanded delivery capabilities, and in-restaurant operational improvement are working, and should put comps in the 4%-5% range for the year. Taco Bell (comps up 4%, 5% in the U.S.) also continues to benefit from many of the same strategies, with greater awareness over GrubHub delivery coverage likely to keep full-year comps in the midsingle digits. Pizza Hut continues its gradual transition to an off-premises concept, with a more attractive entry price anchor ($5 medium pizza). With flat comps for the quarter, some investors may have been looking for further signs of its turnaround, but we expect improvement as the year progresses with improved marketing support behind its recent menu initiatives (with expanded GrubHub coverage offering upside).

We continue to see implied system sales growth of 6%-7% (2%-3% comps and roughly 4% unit growth, a modest uptick in company-owned units but also refranchised locations) as a reasonable if not slightly conservative target for 2019. We also view double-digit core operating profit growth (which is ahead of its 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 plans to reduce cumulative general and administrative expenses to 1.7% of systemwide sales) and adjusted EPS of $3.75 ($3.73 on a GAAP basis) as achievable targets. A slight uptick in technology-related capital expenditures ($225 million, or roughly $125 million after refranchising fees) will not affect our fair value, as the uptick will largely be reimbursed by future franchisee service fees.