Yum Brands' Pending China Spinoff Likely To Overshadow Q3 Results

Yum! Brands, Inc. YUM is scheduled to report its Q3 results on October 5. The results are likely to be “of secondary import relative to the company’s outlook post the China spin,” Wells Fargo’s Jeff Farmer said in a report. He maintained a Market Weight rating on Yum Brands, with a valuation range of $85-$89.

Analyst Farmer expects the company to report Q3 EPS of $1.13, representing 13 percent y/y growth and beating the Street expectation of $1.10. “On New Yum!, investors remain curious about G&A efficiencies, which based on peer analysis, appears to be an area for potential improvement.”

The EPS estimates for 2016 and 2017 have been reduced from $3.72 to $3.70 and from $4.20 to $4.17 to reflect currency pressures.

Sequential Improvement In China SSS

Farmer projected China SSS of 5 percent for Q3, with KFC up 6 percent and Pizza Hut Casual Dining flat. He wrote, “KFC’s promotions and with the brand facing still favorable 3-year SSS comparisons we expect YUM to point mid-single-digit SSS growth at KFC and a continued improvement at Pizza Hut through the first 4 weeks of 4Q16.”

What’s Next?

After the China-spin dust settles, investors are likely to focus on potential opportunities at New Yum. Although the company is likely to slow repurchase activity post the spin, there could be cost cuts or refranchising that may provide upside to cash flows or leverage, the analyst commented.

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