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Yum! Brands: A Sideways Stock In Near Term

 December 08, 2012 02:09 PM
 


(By Mani) Yum! Brands, Inc. (NYSE: YUM) envisions sustainable double-digit EPS growth through the next decade as the model's shift towards high-return emerging markets continues. However, the China concerns are likely to keep the shares range-bound.

The restaurant chain believes China comp weakness is transitory and expects mid-single-digit comps in fiscal 2013. However, the first half of 2013 is likely to be weak followed by recovery in the second-half as comparisons ease.

Moreover, Yum expects a China comp rebound based on historical trends and easing comparisons, rather than new evidence of a macro or bottoms-up recovery.

[Related -Yum! Brands, Inc.(NYSE:YUM): An Attractive Stock To Own Given Potential EPS Growth]

Unit growth guidance for 700 plus in 2013 is lower than about 800 in 2012, but represents management's highest initial outlook ever.

"While shares may chill for a bit, long-term risk reward remains in the upper echelon of the group," Oppenheimer analyst Brian Bittner wrote in a note to clients.

The company's 2013 EPS guidance relies on 15 percent EBIT growth in China. Restaurant margins are expected to be 19-20 percent, versus 19 percent in '2012 as food costs inflate. New units now shift to Tier 3-6 markets where new locations have a 600 basis points (bps) positive margin gap compared to Tier 1-2.

China is a big market and opening of more restaurants could lead to long term growth prospects. Currently, there are approximately 300 million potential consumers in China, and is predicted to double in the next 8-9 years on population growth. Unlike its nearest peer, McDonald's (NYSE: MCD), which built most of its China restaurant locations in Tier 1 and 2 cities, Yum has expanded throughout the country.

[Related -VeriFone Systems Inc (PAY): Buy This Leader In Mobile Payments On Its 55% Pullback]

"YRI. '13 is positioned for a banner year and 10% segment EBIT growth appears conservative," Bittner said.

Meanwhile, emerging markets are now a robust 50 percent of the international unit's profits and could approach 60 percent by 2015. The business could build 950 plus units in 2013 and out of that about 90 percent will be franchised, which is accretive to margins and enhances cash generation.

In addition, Taco Bell has multi-year runway for improving fundamentals. Additional Doritos Tacos and Cantina Bell stock keeping units will roll out while breakfast is in early stages, and ad spend will shift to 100 percent national. Cost savings and franchise incentives could accelerate unit growth and drive 2,000 new units over the next decade.

Yum Brands reiterated "at least" 13 percent and 10 percent EPS growth in fiscal 2012 and 2013, respectively.

"We are on board with the long-term story, but believe recent SSS weakness in China and uncertainty regarding its cause or longevity could keep shares range-bound near term," Bittner added.

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