Ushering in good news for Yum! Brands, Inc. (YUM Quick QuoteYUM - Free Report) , brokerage firm Nomura Securities has chosen the company as its new top pick in the large-cap restaurant space.

Reaffirming a Buy rating on the stock, the firm has lifted its target price on Yum! Brands to $95.00 (from $92.00), highlighting a potential upside of 13.2% from the company’s previous close of $83.89.

Details

Yum! Brands currently reports under four segments — China, KFC, Pizza Hut and Taco Bell.

Notably, Taco Bell has been witnessing sluggish comps growth, hurt by intense competition in the domestic market, especially in the breakfast segment.

YUM! BRANDS INC Price

YUM! BRANDS INC Price | YUM! BRANDS INC Quote

Thus, Nomura has put forward the suggestion of divesting Taco Bell as the division generates majority of its income from the U.S. and doesn’t seem to have any prominent synergies with the company's other chains, Pizza Hut and KFC.

The firm believes that the streamlining of units will boost growth at YUM! Brands. Nomura also highlighted the improved sales trends at Pizza Hut in the U.S. Notably, comps at the Pizza Hut division grew 5% in the U.S. markets in the first quarter of 2016.

Meanwhile, analysts at Nomura downgraded several restaurant chains, including burger-giant McDonald's Corp. (MCD Quick QuoteMCD - Free Report) , because of slow comps growth.

What’s Up at Yum! Brands?

Yum! Brands has performed relatively well in the domestic and many key international markets. The company is forging ahead with its efforts to revive the domestic business through menu innovation and marketing initiatives. Notably, year-to-date, the stock has returned nearly 15%.

Moreover, Yum! Brands has adopted a de-risking strategy by reducing its ownership of restaurants through refranchising. Refranchising a large portion of the system reduces the company’s capital requirements and facilitates earnings per share growth and ROE expansion.

Meanwhile, in Oct 2015, Yum! Brands announced its plans to spin off the China business into an independent, publicly-traded company. The company stated that post separation, each of the two companies – Yum! Brands and Yum! China – is expected to return about 15% per year to shareholders through earnings growth and dividends. The spin-off, expected to be completed by the end of 2016, should help the company to turn around the division in a more effective way.

Notably, the reorganized Yum! Brands is likely to be 96% franchised by the end of 2017. The company will have provision to triple its unit count over the long haul with strong growth from emerging markets.

Our Take

For full-year 2016, management expects operating profit growth (in constant currency) of 12%, up from the previously announced guidance of 10%. Notably, management raised its guidance mainly on the back of better-than-expected operating profits in the first quarter of 2016, which was in turn driven by strong growth at the China segment.

Meanwhile, the upward estimate revisions reinstate hope on the stock’s prospects. The Zacks Consensus Estimate for 2016 and 2017 climbed 0.8% and 1.7%, respectively, over the last 60 days. Moreover, for 2016, sales and EPS are likely to improve 2.1% and 15.5%, respectively, further underlining its potential.

Thus, given the positive outlook and the company’s performance so far, it seems like Nomura’s right about the bull case for Yum! Brands which also has room for more upside in the days ahead.

Yum! Brands currently has a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International Inc. (PZZA Quick QuotePZZA - Free Report) and The Wendy's Company (WEN Quick QuoteWEN - Free Report) . Both the stocks carry a Zacks Rank #2 (Buy).

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