Yum Brands' Better Business Model

Recapping Yum! Brands, Inc. (NYSE: YUM)'s Investor Day, Baird said it believes the company is transitioning to a leaner and much more capital efficient growth model following the upcoming spinoff of its China division.

Measures To Transition To Attractive Business Model

Analyst David Tarantino noted that the company intends to increase the franchise mix for Yum, excluding China, to 98 percent by the end of 2018 from about 93 percent post the spinoff. Among the other measures are creating a leaner G&A structure and reduced capex spending, the analyst noted.

Financial Metrics Target

Baird expects the company to return substantial amount of cash to shareholders, achieve earnings per share of $3.75+ in 2019 and accelerate annual system sales growth. Accordingly, the firm sees annual EBIT up in high-single-digits and shareholder returns in the mid-teens.

Related Link: Yum Brands: The Transformation

Yum China Growth Outlook Positive

Baird is positive on the longer-term outlook for Yum China, although it is concerned about the near term visibility on same store sales.

Waiting For Better Entry Point

Given concerns about the valuation for the China business, Baird prefers to wait for a better entry point before adopting a more constructive stance on the combined business. Baird remains at Neutral on Yum but lifted its price target to $95 from $92.

At last check, Yum was trading up 1.14 percent at $89.28.

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