EUR 850.00 For Business Accounts Only

Morningstar | Yum's Taco Bell and KFC Offer Stability as Pizza Hut Transformation Efforts Come Into Focus

Wide-moat Yum Brands' third-quarter results reaffirmed its position as one of the more reliable global QSR operators. There is still room for improvement, as inconsistent value messaging and underperforming dine-in restaurants are weighing down Pizza Hut U.S. (comps up 1%). Also, certain Pizza Hut International markets (comps down 3%) such as China are in the early stages of transformation efforts and will require a greater focus on value, a streamlined menu, and new restaurant formats. However, we believe that the key takeaway is that Yum is well ahead of consumer and other structural industry changes, evidenced by category-leading comps of 5% at Taco bell and strong global comps of 3% at KFC. Both brands continue to leverage differentiated approaches to marketing, an effective balance between everyday value, bundling promotions, and limited-time offers (such as Nacho Fries at Taco Bell), and improved delivery capabilities (via Yum's relationship with GrubHub).

We're planning to raise our $86 fair value estimate by a few dollars because of a more optimistic near-term comp outlook for Taco Bell (4%-5% for the remainder of 2018 and 2019) and KFC (3%-4%). Yum's 2018 top-line guidance--including consolidated comps around 2% and unit growth of 4%--strikes us as reasonable, as do expectations calling for flat core operating profit growth, which reflects positive adjustments for refranchising and subsequent G&A savings but lower Pizza Hut profits). We remain comfortable with our five-year targets, including average annual system sales growth of 6%-7% and core operating margin growth in the low-double-digits (which also assumes Yum meets its 2019 EPS target of $3.75). While we more attractive opportunities elsewhere in the space--including wide-moat McDonald's and Starbucks--we still view Yum as a core holding offering a balance between global growth and capital allocation (Yum's 2017-19 cash return goal of $6.5 million-$7.0 billion remains on track).

As we discussed in our Oct. 2 piece, "The Restaurant Industry Is Evolving--Your Key Performance Benchmarks Need to, Too," we believe Yum's Taco Bell brand is at the top of the list at understanding its position in an evolving industry landscape, with recent menu, operational improvements, marketing strategies, and technology enhancements positioning the company to maximize convenience and throughput, which in turn should be additive to the brand intangible asset behind our wide-moat rating.