YUM SHARES APPETIZING FOR 2013

News flow for YUM in China may be negative for much of 1H13 but investors looking to buy a global retail stock for the long-term TAIL have an attractive opportunity today in Yum! Brands.

 

Guidance Revised

 

The headlines this morning are decidedly negative for YUM’s stock as the company released an 8-K yesterday after the close describing the impact of a probe into a former chicken supplier for the company as “significant”.  Last night’s 8-K also revised 4Q China SSS guidance to -6% from -4%.  Previously, on December 21st, the company had described the impact of the government probe on demand as “moderate”.

 

YUM SHARES APPETIZING FOR 2013 - china pod 1

 

 

There will likely be pressure on YUM’s shares over the near-term TRADE as this news is absorbed but there are a couple of things worth bearing in mind:

  • The suppliers implicated in the government probe represent an “extremely small percentage of product to KFC”, according to YUM.  Given the size of this company and the importance of China to its overall profitability, we are confident that management will go to appropriate lengths to address any trust issues consumers have. 
  • In 2011, Taco Bell in the US was subject of a lawsuit, which was ultimately dropped, that had a significant impact on the US business. The company’s response was vigorous and it is clear that consumer perception has been improved.  We expect management to act with even more urgency in this instance, given the importance of China to overall profitability.

YUM SHARES APPETIZING FOR 2013 - yum op inc geography

 

 

What Matters


China is a huge part of Yum! Brands and it is no surprise that the stock price reaction to the guidance revision has been so strong.  However, YUM remains our best pick for 2013.  The enterprise value will continue to accrete value at 10-13% per year with added gains possibly coming from a 2% dividend yield and share repurchases in 2013. 

 

The argument for near-term multiple contraction is purely a forecast on sentiment.  The growth potential of YUM, in our view, is unrivalled in the restaurant industry when the capability of management to execute is considered.  Even if there is a one-multiple contraction in EV/EBITDA, we see downside reaching $63-64, which is where the stock rallied from in December. 

 

The macro setup in China has been improving and, despite narratives that will attempt to attribute all of the recent softness in China to a probe into a chicken supplier of a small percentage of KFC’s product in the country, slowing growth was clearly a factor in recent decelerations in same-store sales growth.  The retail sales environment in China is sequentially improving as of November 2012 and, if this continues into 2013, we believe it will benefit YUM as the negative headlines abate.

 

For 2013, we still believe that there is upside in the shares to $85-90 per share. 

 

YUM SHARES APPETIZING FOR 2013 - china retail sales growth

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more