Yum! Brands. Inc. (YUM) OUTPERFORM K. Siegner
CP: US$ 32.95 TP: US$ 41 CAP: US$ 15.8b
Oct China PMI: Growth Risk Disappearing
• China PMI suggests further growth acceleration likely: At 55.2, the headline index reached the highest level since April 2008.
CS economists now see upside risk to their 4Q real GDP growth est. of 10% (PMI implies 10.4%-10.9%) and, given broad and accelerating momentum, believe GDP growth will remain >8% even if the US sees a second dip. The food PMI was similarly encouraging, up 3.1 pts seq. to 61.9 and the highest reading in the five years of the survey.
• The multiple applied to YUM's China business should re-expand: We are more optimistic about the China "tone" and guidance we will get in Dec., and continue to believe the risks specific to the China business are abating: (1) economic growth risk:: CS economists are very positive on what this PMI data implies for economic growth, and believe headline risk from weak economic data has largely disappeared. (2) Inflation risk: Recovery momentum is strong enough that some of the focus can shift to removing monetary stimulus and stemming inflation. We see as a positive given the challenges of pricing in an inflationary environment. (3) Competition: This will increasingly be the question, and we continue to believe YUM's strategy of investing in its own supply chain and growing into under-penetrated lower-tier cities makes it the least exposed global player to increasing competition in the major cities.
• Catalysts: YUM hosts its New York analyst day on Dec. 9th, which offers our first look at detailed F10 guidance (incl. regional breakdowns). We believe shares could react strongly to the growth drivers in EPS guidance (comps vs. unit growth vs. margins vs. repurchases.)
• Valuation: We base our DCF-supported $41 price target on a 16x multiple applied to our NTM est, 12 mo. from now, of $2.53.
We believe the advantages of YUM's int'l footprint and ongoing reallocation of capital from low growth to high growth returns
regions justify a premium to the peer avg. of 14.5x.