As we said on our Yum call yesterday the company has been, and continues to be, a stock that you buy on China scares. The sell off this morning, in the wake of yesterday’s release from the company, presents another opportunity to buy the best Large Cap restaurant stock. With regard to China, same-restaurant sales is a critical metric but unit growth is more important, in our view, that allows the company to achieve its stated guidance.
YUM stated that SRS in 4Q are expected to be +4% at YRI, +3% in the U.S., and -4% in China. The China numbers are missing consensus by 600bps and represent a +8.5% on a two year basis. Both YRI and the USA results are better that consensus and consistent with our thesis.
On the development front, international development is expected to be at least 1,850 new units for the year, including at least: 800 new units in China (upside surprise), 950 at Yum! Restaurants International (upside surprise), and 100 at Yum! Restaurants India.
YUM is also lapping a Q4 headwind due to an additional week in 2011 fiscal year which produced a combined $26M operating profit benefit to the U.S. and YRI.
The company reaffirmed its guidance for 4Q12 of “at least” $0.82, but the Street was ahead of the company at $0.85. The reaffirmation of FY12 guidance highlights one of our points during yesterday’s call: the company’s geographically diverse business model allows it to achieve targets despite weakness in certain markets. In this case, it is its most important business, China, that is seeing weakness but the company is still expecting to achieve its FY12 guidance.
FY13 guidance contained no material surprises:
- The company expects at least 10% in EPS growth (street modeling more)
- At least 1,800 new international units, including at least: 700 new units in China, 950 at YRI, and 150 at Yum! Restaurants India (as per our theses we expect upside to these numbers)
- Estimated tax rate of about 27% with quarterly fluctuation
- Foreign currency translation expected to be flat
- Global capital expenditures of over $1B
- Interest expense expected to be flat
- 2% reduction in average diluted shares outstanding as a result of share repurchases
- Worldwide G&A increase of 3% due to continued growth in China
This morning, the stock was cut to Neutral vs Buy at UBS, Neutral vs Positive at Susquehanna, and Underperform vs Market Perform at UBS. We would buy the stock on these downgrades.