Morgan Stanley: Watch China Commentary During Yum! Brands Conference Call

Yum! Brands, Inc. YUM will announce its second quarter financial results on Tuesday afternoon, after the market closes. Ahead of the report, Morgan Stanley analyst John Glass and his team reiterate an Equal-Weight rating and $82.00 price target on the stock, and advise investors to keep an eye on the management’s comments regarding the China business in the upcoming conference call.

Related Link: Yum! Brands Expected To Deliver Double-Digit YoY Decline In Earnings

The experts note that the top line is probably going to recuperate slowly in China. However, they expect shares to be driven by commentary regarding spinning this business. “Recent weakness in Chinese market negatively impacts sum of parts valuation but wouldn’t scotch any possible spin plans,” they add.

Ahead Of The Report

Morgan Stanley is modeling earnings of $0.63 per share for the second quarter, in line with the Street, and down 14 percent year-over-year. They anticipate these results will be driven, among other things, by an 8 percent decline in China same store sales and 13.5 percent restaurant margins in the country. The experts believe “Any positive commentary about a China recovery would be a plus for the stock,” while other details on the quarter won’t really matter.

In addition, they say, investors are probably expecting some kind of commentary regarding the recent activist proposals to spin off the Chinese business that the company has received. Until now, management has not indicated whether it is considering them or not.

Meanwhile, Morgan Stanley thinks:

1) Although timing remains uncertain, spinning of the Chinese business as a master franchisee is compelling from a financial standpoint

2) A series of factors including the Chinese equity crisis will lead to a slower recuperation of the company’s fundamentals in the country.

That said, the analysts are “consistently impressed with YUM's margin gains and have more confidence in its ability to drive out restaurant level costs,” and anticipate restaurant margins could hit previous peaks before AUVs.