Shares of Yum Brands, Inc. ( YUM) are a great way to gain exposure to China's booming economy as well as other fast-growing international markets, while investing in the only stable segment of the restaurant industry. The restaurant operator plans to introduce new products, including beverages and value menus at all three of its U.S. brands: KFC, Taco Bell and Pizza Hut.
The company's management is actively managing its capital, returning much of its free cash to shareholders with plans to repurchase up about $4 billion shares outstanding in 2008 and 2009, further reducing the share count by 20 percent from 2007 levels. We note that the proceeds from refranchising restaurants are offsetting a portion of its capital spending and generating additional cash flow for Yum.
We keep our Buy recommendation and six-month target price of $43 on the stock, based on the signs of company's revival in the domestic market and its booming presence in China. We expect the company's plans to bear fruit in the second half of the year, although we think improvement will be slow and gradual.
Cash In on Hibbett Sports
We keep our Sell recommendation on
Hibbett Sports, Inc. (
HIBB),
as we believe despite the sporting-goods retailer's
better-than-expected first quarter results, the downside risk still
outweighs the upside for the shares. We believe the difficult consumer
spending environment will put pressure on the company's sales trends
for the remainder of 2008 and expect its profit margins to contract
further.In recent times, Hibbett's business trends have not been
strong as cash-strapped customers cut their discretionary spending.
Another worry for Hibbett is that industry leader,
Dick's Sporting Goods (
DKS),
is expanding into smaller markets. A key part of Hibbett's growth story
is that its stores had few competitive pressures. If this trend
continues and big-box retailers enter smaller markets, Hibbett will not
be able to meet current earnings estimates.HIBB shares trade at a
premium to its industry peers and nearly 22x our fiscal 2009 EPS
estimate. Given the difficult retail environment, the multiple does not
look sustainable and we think this premium is ripe for a contraction.
In our view, HIBB shares could decline to 15x our 2009 EPS estimate or
$14 per share. We thus raise our target price to $14 from $10.
