Consumer Products

Analyst Sum of the Parts Review Shows Yum! Worth Much More

Chris Lange

A fundamental question that growing companies must continue to ask themselves is, are the parts worth more than the whole? In the case of Yum! Brands Inc. (NYSE: YUM), Oppenheimer would argue that it is time to breakup in its most recent valuation analysis as a sum of the parts. In fact, Oppenheimer believes that Yum! would be immediately worth $81 to $97 per share if it was separated in to three new companies.

Oppenheimer has a rating of Outperform for Yum!, as well as a price target of $80. This call had very little impact in near-term trading but does allow a longer-term investor to see value that is different from what the stock ticker tape says on a down day.

Monday’s analysis shows that the company could be split into three entities: Taco Bell ($6 billion market cap), KFC and Pizza Hut ex-China ($17 billion market cap) and China/India ($15 billion to $22 billion market cap). Yum! was recently trading at $68.35 and currently has a market cap of roughly $30 billion.

Potentially, shareholders would see an immediate upside to this breakup. Also they would be able to select across three options within this theoretical structure. Another plus would be breaking the unwanted marriage with China, while providing a separate vehicle to participate in its higher risk/reward profile.

Standing alone, KFC and Pizza Hut would boast abundant free cash flows and double-digit profit growth in the Oppenheimer model. Taco Bell, domestically, is coming off a strong breakfast roll-out that has it poised to accelerate unit growth, and the company also has a large upside with a completely untapped global opportunity.

Yum! is among the world’s largest public restaurant chains with roughly 40,000 units, although some 80% or so of these are franchised. Taco Bell has a franchise rate of 85%, while KFC and Pizza Hut have a 93% franchised business mix.

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The company’s shares were down 1.4% at $68.35 in late Monday trading. Yum! has a consensus analyst price target of $78.41 and a 52-week trading range of $64.08 to $83.58.