YUM: CHINA WILL BE KEY IN 2014

INVESTORS AREN’T SOLD ON A FULL RECOVERY IN CHINA

In light of yesterday’s downgrade, we’d like to reiterate our LONG call on YUM.

 

It is our belief that the vast underperformance of its China Division in 2013 was largely driven by circumstantial issues (food supplier incident and Avian Flu) rather than structural issues.  In fact, we believe YUM continues to have a material opportunity to capitalize on a growing consumer class in China that is expected to double from 300mm+ in 2012 to 600mm+ by 2020.  While China same-store sales could remain volatile in 2014, we believe they will accelerate meaningfully over the prior year. 

 

The trend in both sales and margins in China suggest that the company has made significant progress restructuring the business, setting the stage for improved profitability in 2014.  We believe there is enough pessimism around a potential recovery in China (as evidenced by yesterday’s downgrade) that there is upside to estimates in 2014.

 

SUBSTANTIAL LONG-TERM GROWTH OPPORTUNITY

YUM is currently our favorite LONG in the big cap QSR landscape fueled by a substantial long-term growth opportunity, including a strong and growing presence in China as the country transitions from a producer to a consumer economy.  We believe China same-store sales will not only benefit from easy comparisons, but will also be driven by incremental sales from menu innovation and daypart expansion in the region.  In addition to China, YUM has positioned itself well for the future through considerable penetration in other developing markets. 

 

YUM has been strong in the U.S. for the past couple of years, led primarily by an innovative Taco Bell business.  We believe the company has the correct drivers in place to capture additional market share and drive incremental sales at this concept.  The breakfast daypart is a huge opportunity for Taco Bell and, if successful, could drive incremental gains.

 

 

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 4 38 00 PM

 

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 16 26 AM

 

 

WELL-POSITIONED FOR 2014

Easy same-store sales comparisons in China, improving margins across the major divisions, and a potential acceleration in domestic consumer spending could all lead to multiple expansion in 2014.  Investors punished the stock on bad news for the majority of 2013 and, as such, we expect them to reward the stock on good news throughout 2014.  As it stands, we see approximately 16-30% upside in the stock (depending on the trajectory of profitability in China), implying a stock price between $87 to $100 per share.

 

 

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 4 54 38 PM

 

 

In the series of annotated charts below, we run through our bull case from a fundamental perspective.  It quickly becomes clear that operating margins are set to accelerate and that a turnaround in China would have a considerable impact on the profitability and earnings of the company.

 

 

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 43 08 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 43 45 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 44 17 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 44 54 AM

YUM: CHINA WILL BE KEY IN 2014 - 1 10 2014 7 45 27 AM

YUM: CHINA WILL BE KEY IN 2014 - yum cost of sales

YUM: CHINA WILL BE KEY IN 2014 - laborrrr china

YUM: CHINA WILL BE KEY IN 2014 - other expppppeppepe

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 18 46 PM

YUM: CHINA WILL BE KEY IN 2014 - us rlmnsjpg

YUM: CHINA WILL BE KEY IN 2014 - intl rlmns

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 17 06 PM

YUM: CHINA WILL BE KEY IN 2014 - gagagaga

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 14 52 PM

YUM: CHINA WILL BE KEY IN 2014 - 1 9 2014 3 21 37 PM

YUM: CHINA WILL BE KEY IN 2014 - yum intl op margins

YUM: CHINA WILL BE KEY IN 2014 - chinappp

 

 

Feel free to call with questions.

 

 

Howard Penney

Managing Director

 


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

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more