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Bernstein On Yum Brands' Q2: More Plusses Than Minuses

Yum! Brands, Inc. (NYSE: YUM) delivered a 2Q16 beat, raised guidance and continues to witness momentum in China. Bernstein’s Sara H. Senatore maintained an Outperform rating on the company, with a price target of $97.

Yum Brands reported adj. diluted EPS of $0.75, a penny ahead of the consensus, with lower interest expenses and other charges offsetting “a muted top line,” analyst Sara Senatore noted.

China Performance

China comps were flat and in-line with expectations. Restaurant margin came in at 15.7 percent, above the consensus expectation of 14.7 percent.

“Encouragingly, both KFC and Pizza Hut are currently comping positive,” Senatore commented. PH comps were flat amid a competitive demand environment, with restaurant margins of 9.4 percent. KFC comps were at +2 percent, with restaurant margins of 14.5 percent.

Investment Implications

“The report was a somewhat mixed bag, as has historically the case for Yum!'s portfolio of businesses, but on net the plusses were greater than the minuses, with China's performance in the quarter – and importantly, positive comps at both brands currently -- offering further evidence that the business is on firmer footing,” the analyst wrote.

Like other US brands, Yum Brands is facing a challenging competitive environment. However, the company raised its operating profit growth guidance from 12 percent to 14 percent. This confirms Yum Brands continues to be a “beat and raise story,” especially since the company is expected to repurchase shares more aggressively in the months ahead, Senatore said.

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Jul 2016JP MorganMaintainsOverweight
Jul 2016NomuraMaintainsBuy
Jul 2016CLSAMaintainsUnderperform

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