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Is Yum China a Better Bet for Investors Than Yum! Brands?
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On Nov 1, 2016, Yum! Brands, Inc. (YUM - Free Report) announced that it has spun off its all-important China division into an independent, publicly traded company Yum China Holdings, Inc. (YUMC - Free Report) .
Post separation, Yum China holds exclusive rights of the KFC, Pizza Hut and Taco Bell brands in China, and also has the provision to add new brands. At the end of Feb, 2017, Yum China had more than 7,600 restaurants in over 1,100 cities mostly under the KFC and Pizza Hut brand. Taco Bell too opened its first restaurant in China at the end of 2016. Additionally, Yum China owns the Little Sheep and East Dawning concepts outright. The company is expected to be able to triple its unit count in the long term.
Meanwhile, the new Yum! Brands’ will have the provision to triple its unit count in the long term with strong growth from the emerging markets. Also, it will receive a license fee of 3% of the sales generated in China through KFC, Pizza Hut and Taco Bell. However, the company will not get any fees initially for new units in China.
In fact, post separation, each of the companies – Yum! Brands and Yum China – is expected to return about 15% annually to shareholders through earnings growth and dividends.
The spin-off has certainly led to the establishment of two powerful, independent companies, each well capitalized with long runways for growth and value creation. Among the two, Yum China has emerged as a bigger winner with its stock rising 22.3% since the date of separation, while Yum! Brands recorded a gain of 5.7%.
What’s Driving Yum China Faster than Yum! Brands?
The division’s spin-off has made Yum! Brands a more asset-light company, in large part, as many company-owned restaurants have been in the Chinese market. Post spin-off, the company aims to drive growth by employing greater focus on the development of its three iconic global brands, particularly in the U.S., increasing its franchise ownership, and creating a leaner, more efficient cost structure.
Particularly, the company is committed toward becoming at least 98% franchised by the end of 2018. Thus, Yum! Brands’ expects to become a "pure play" franchisor with more stable earnings, higher profit margins, lower capital requirements and stronger cash flow conversion.
Yum! Brands China business − which accounted for more than half of the company’s total revenue − played a pivotal role in its solid performance, over the last few years. In fact, its manifold efforts are poised to reap benefits in the long-term. But slight uncertainty surrounding the company’s business post the spin-off of the China unit, soft sales backdrop in the U.S. restaurant space along with increasing competition might continue to weigh on its performance.
In fact, for 2017, while EPS is expected to grow 11.4%, sales are likely to witness a decline of 48.6%.
However, Yum China performed well after its spin-off from Yum! Brands. The company has been successful in attracting customers with its loyalty program, digital leadership and more delivery options, thereby driving comps.
Yum China is also hoping to fuel growth with Taco Bell brands and plans to open more units this year. In 2017, the company seems to be confident about opening 550-600 new restaurants, while delivering double-digit growth in operating profit, excluding the foreign currency impact.
Meanwhile, we note that a new generation of millennials who are digitally cultured and brand driven are fueling consumption growth in China. In fact, constant growth of the middle class and urban population there is anticipated to create the world's largest market for restaurant brands, with Yum China as the market leader.
With almost no debt and substantial free cash flow, Yum China has thus by far been successful in delivering strong growth and is expected to continue doing so. Additionally, for 2017 sales growth is pegged at nearly 4%, while earnings per share (EPS) is likely to improve 10.7%.
Earnings Results
Yum China has exceeded earnings expectations in both the quarters it has reported so far. Focusing on the first-quarter 2017 results reported on Apr 5, we note that adjusted EPS of 44 cents beat the Zacks Consensus Estimate by 18.9%. Sales of $1.28 billion, however, fell slightly short of the Zacks Consensus Estimate of $1.29 billion. Same-store sales grew 1% in the quarter. Also, comps at both KFC and Pizza Hut Casual Dining witnessed a rise of 1% and 2%, respectively, in the said quarter.
Meanwhile, post-separation, Yum! Brands reported fourth-quarter 2016 adjusted earnings of 79 cents per share, which surpassed with the Zacks Consensus Estimate by 9.7%. Further, earnings increased 19% year over year due to lower share count and higher revenues. Meanwhile, total revenue of $2.02 billion also inched up 2.4% year over year primarily owing to higher franchise and license fees and income. Notably, revenues came almost in line with the Zacks Consensus Estimate.
Estimate Revisions Trend
Over the last 60 days, the Zacks Consensus Estimate for Yum China’s current year’s earnings has moved up 5.2%, reflecting three upward revisions versus none downwards. Also, next year’s earnings estimate has inched up 7.3%, on the back of two upward revisions as against no downward revisions. All these positive earnings estimate revisions testifies the unwavering confidence that analysts have in the company and also adds to the optimism in the stock.
On the contrary, Yum! Brands’ current year estimates have remained flat over the last two months, given one upward revision versus two downwards. However, next year earnings estimates have jumped up 1.3% over the past two months on the back of one upward and downward revision.
Conclusion
Yum China, sporting a Zacks Rank #1 (Strong Buy) looks like the smarter pick for investors in the restaurant industry right now, given better estimates and analyst sentiment, superior price performance and clearer growth opportunities. But that does not mean Yum! Brands, with a Zacks Rank #2 (Buy) have no chance of performing well. However, based on the current circumstances, we advise investors to put their money on Yum China.
Key Picks
Other favorably-ranked stocks in the Zacks categorized Retail-Restaurants include Restaurant Brands International Inc. (QSR - Free Report) and Papa John's International Inc. (PZZA - Free Report) . While Restaurant Brands sports a Zacks Rank #1, Papa John's currently holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Restaurant Brands’ earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 19.20%. Meanwhile, for 2017, EPS is expected to improve 14.9%.
Papa John’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 10.26%. Further, for 2017, EPS is expected to grow 10.2%.
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Is Yum China a Better Bet for Investors Than Yum! Brands?
On Nov 1, 2016, Yum! Brands, Inc. (YUM - Free Report) announced that it has spun off its all-important China division into an independent, publicly traded company Yum China Holdings, Inc. (YUMC - Free Report) .
Post separation, Yum China holds exclusive rights of the KFC, Pizza Hut and Taco Bell brands in China, and also has the provision to add new brands. At the end of Feb, 2017, Yum China had more than 7,600 restaurants in over 1,100 cities mostly under the KFC and Pizza Hut brand. Taco Bell too opened its first restaurant in China at the end of 2016. Additionally, Yum China owns the Little Sheep and East Dawning concepts outright. The company is expected to be able to triple its unit count in the long term.
Meanwhile, the new Yum! Brands’ will have the provision to triple its unit count in the long term with strong growth from the emerging markets. Also, it will receive a license fee of 3% of the sales generated in China through KFC, Pizza Hut and Taco Bell. However, the company will not get any fees initially for new units in China.
In fact, post separation, each of the companies – Yum! Brands and Yum China – is expected to return about 15% annually to shareholders through earnings growth and dividends.
The spin-off has certainly led to the establishment of two powerful, independent companies, each well capitalized with long runways for growth and value creation. Among the two, Yum China has emerged as a bigger winner with its stock rising 22.3% since the date of separation, while Yum! Brands recorded a gain of 5.7%.
What’s Driving Yum China Faster than Yum! Brands?
The division’s spin-off has made Yum! Brands a more asset-light company, in large part, as many company-owned restaurants have been in the Chinese market. Post spin-off, the company aims to drive growth by employing greater focus on the development of its three iconic global brands, particularly in the U.S., increasing its franchise ownership, and creating a leaner, more efficient cost structure.
Particularly, the company is committed toward becoming at least 98% franchised by the end of 2018. Thus, Yum! Brands’ expects to become a "pure play" franchisor with more stable earnings, higher profit margins, lower capital requirements and stronger cash flow conversion.
Yum! Brands China business − which accounted for more than half of the company’s total revenue − played a pivotal role in its solid performance, over the last few years. In fact, its manifold efforts are poised to reap benefits in the long-term. But slight uncertainty surrounding the company’s business post the spin-off of the China unit, soft sales backdrop in the U.S. restaurant space along with increasing competition might continue to weigh on its performance.
In fact, for 2017, while EPS is expected to grow 11.4%, sales are likely to witness a decline of 48.6%.
However, Yum China performed well after its spin-off from Yum! Brands. The company has been successful in attracting customers with its loyalty program, digital leadership and more delivery options, thereby driving comps.
Yum China is also hoping to fuel growth with Taco Bell brands and plans to open more units this year. In 2017, the company seems to be confident about opening 550-600 new restaurants, while delivering double-digit growth in operating profit, excluding the foreign currency impact.
Meanwhile, we note that a new generation of millennials who are digitally cultured and brand driven are fueling consumption growth in China. In fact, constant growth of the middle class and urban population there is anticipated to create the world's largest market for restaurant brands, with Yum China as the market leader.
With almost no debt and substantial free cash flow, Yum China has thus by far been successful in delivering strong growth and is expected to continue doing so. Additionally, for 2017 sales growth is pegged at nearly 4%, while earnings per share (EPS) is likely to improve 10.7%.
Earnings Results
Yum China has exceeded earnings expectations in both the quarters it has reported so far. Focusing on the first-quarter 2017 results reported on Apr 5, we note that adjusted EPS of 44 cents beat the Zacks Consensus Estimate by 18.9%. Sales of $1.28 billion, however, fell slightly short of the Zacks Consensus Estimate of $1.29 billion. Same-store sales grew 1% in the quarter. Also, comps at both KFC and Pizza Hut Casual Dining witnessed a rise of 1% and 2%, respectively, in the said quarter.
Meanwhile, post-separation, Yum! Brands reported fourth-quarter 2016 adjusted earnings of 79 cents per share, which surpassed with the Zacks Consensus Estimate by 9.7%. Further, earnings increased 19% year over year due to lower share count and higher revenues. Meanwhile, total revenue of $2.02 billion also inched up 2.4% year over year primarily owing to higher franchise and license fees and income. Notably, revenues came almost in line with the Zacks Consensus Estimate.
Estimate Revisions Trend
Over the last 60 days, the Zacks Consensus Estimate for Yum China’s current year’s earnings has moved up 5.2%, reflecting three upward revisions versus none downwards. Also, next year’s earnings estimate has inched up 7.3%, on the back of two upward revisions as against no downward revisions. All these positive earnings estimate revisions testifies the unwavering confidence that analysts have in the company and also adds to the optimism in the stock.
On the contrary, Yum! Brands’ current year estimates have remained flat over the last two months, given one upward revision versus two downwards. However, next year earnings estimates have jumped up 1.3% over the past two months on the back of one upward and downward revision.
Conclusion
Yum China, sporting a Zacks Rank #1 (Strong Buy) looks like the smarter pick for investors in the restaurant industry right now, given better estimates and analyst sentiment, superior price performance and clearer growth opportunities. But that does not mean Yum! Brands, with a Zacks Rank #2 (Buy) have no chance of performing well. However, based on the current circumstances, we advise investors to put their money on Yum China.
Key Picks
Other favorably-ranked stocks in the Zacks categorized Retail-Restaurants include Restaurant Brands International Inc. (QSR - Free Report) and Papa John's International Inc. (PZZA - Free Report) . While Restaurant Brands sports a Zacks Rank #1, Papa John's currently holds a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Restaurant Brands’ earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 19.20%. Meanwhile, for 2017, EPS is expected to improve 14.9%.
Papa John’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 10.26%. Further, for 2017, EPS is expected to grow 10.2%.
Zacks’ Best Private Investment Ideas
While we are happy to share many articles like this on the website, our best recommendations and most in-depth research are not available to the public. Starting today, for the next month, you can follow all Zacks' private buys and sells in real time. Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Click here for Zacks' private trades >>