Yum Valuation 'Attractive,' Business Is 'Highly Stable'

Bernstein analyst Sara Senatore reiterated her Outperform rating on Yum! Brands, Inc. YUM, saying the fourth quarter results reflect the resilience of the franchise model, and expects 2017 EPS growth achievable despite refranchising lumpiness and Pizza Hut drag.

Yum Brands quarterly results consisted of an earnings beat and revenue miss. The owner of Taco Bell, KFC and Pizza Hut also reported that its same-store sales rose 1 percent which fell short of the 1.7 percent analysts were looking for.

By segment, both the Taco Bell and KFC business saw a same-store sales growth of 3 percent but the Pizza Hut chain comps fell 2 percent in the quarter.

“Comps matter less now as YUM transitions to a 98% franchised model, with Pizza Hut likely to have the highest franchised mix, but stabilization in that brand will be key to exceeding system growth targets; we believe international markets are farther along than the US,” Senatore wrote in a note.

Senatore still expects upside to system fundamentals if Yum Brands can bring best practices from other markets or brands to improve the struggling Pizza Hut.

Moreover, the analyst believes Yum Brands can EPS and cash flow targets despite the drag from Pizza Hut, given unit growth commitments and evidence of margin progress.

“Development commitments should support ~3%+ unit growth while KFC and TB comp strength should drive at least 1% comps,” Senatore added.

Though the EBIT is expected to be pressured in 2017, the analyst expects reduction in share count should support high-single digit EPS growth.

At last check, shares of Yum Brands rose 1.11 percent to $68.14. Senatore raised her price target to $78 from $76.