Credit Suisse upgrades Yum on positive outlook outside of China
Credit Suisse upgraded Yum! Brands (YUM) to Outperform from Neutral, citing what it sees as a "compelling" long-term outlook for the company's non-China business. Yum is slated to spin off its China business into a separately traded franchisee on November 1. Its current stock will primarily track the value of its non-China business, although Yum will receive a 3% royalty from its Chinese franchisee. 'NEW YUM' POISED TO JUMP: Referring to Yum's non-China business as "New Yum," Credit Suisse analyst Jason West estimates that New Yum's stock can surge to $80 or higher by the end of 2018, up from $62 in the when issued market as of yesterday. NEW YUM'S POSITIVES: Among New Yum's positive attributes are a "balanced portfolio across brands/geographies and relatively low sensitivity to SSS and cost inputs," wrote West. Moreover, at its Investor Day on October 11, Yum announced that it would seek to franchise 98% of New Yum's stores by the end of 2018, versus its previous goal of a 96% franchise rate by the end of 2017, West reported. Refranchising will enable New Yum to lower its general and administrative costs, as well as its capital expenditures, causing its free cash flow to exceed $1B by 2018, the analyst stated. New Yum's 2018 free cash flow will "nearly equal" the original company's 2016 free cash flow, despite the spin off of the China business, West noted. Boosted by share buybacks and dividends, New Yum's bottom line should jump about 40% in 2018 versus 2017, added West. NEAR-TERM VALUATION: New Yum will be worth about $68 in 2017, while Yum China's value will be about $28, based on a sum of the parts model, West estimated. Consequently, he set a $96 price target on Yum's current stock, up from $90 previously. PRICE ACTION: In morning trading, Yum! Brands shares rose 0.7% to $86.72.