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Longbow Downgrades Yum! Brands on Concerns about Pizza Hut

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Longbow’s downgrade

On July 1, Longbow Research downgraded the stock of Yum! Brands (YUM), which owns KFC, Pizza Hut, and Taco Bell, from a “neutral” to an “underperform.” The research company has given YUM a new price target of $91, which implies a potential downside of 17.8% from its price of $110.67 on June 28.

As reported by StreetInsider, Longbow Research analyst Alton Stump said, “YUM! Brands certainly possesses a number of positive long-term attributes, such as its consistent KFC concept and global unit growth potential. However, we do not believe the shares deserve to trade at a substantial premium to its peers, especially given our concerns related to Pizza Hut’s drag on consolidated EBITDA and the likelihood Taco Bell’s comps will slow at least in the near-term.”

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In the first quarter, Yum! Brands outperformed analysts’ EPS expectations, while its revenue was in line with analysts’ estimates. In the quarter, KFC reported impressive SSSG (same-store sales growth) of 5.0% compared to analysts’ expectation of 2.7%. However, the SSSGs of Taco Bell and Pizza Hut were below analysts’ expectations. Read more about Yum! Brands’ first-quarter performance in Why Yum! Brands’ First-Quarter Earnings Failed to Impress.

Since Yum! Brands reported its first-quarter earnings on May 1, UBS, Citigroup, JPMorgan Chase, Bernstein, BTIG, Stifel, and Jefferies have all hiked their price targets.

  • UBS from $105 to $112
  • BTIG from $102 to $114
  • Citigroup from $103 to $105
  • Morgan from $94 to $97
  • Bernstein from $105 to $1117
  • Jefferies from $85 to $93
  • Stifel from $94 to $100

However, BMO had cut its price target from $100 to $98.

Overall, analysts are in favor of a “buy” rating on the stock, with 54.2% of the 24 analysts that follow it giving it “buy” ratings, 37.5% giving it “holds,” and 8.3% giving it “sells.” On average, analysts have a 12-month price target of $104.90 on the stock, which implies a potential downside of 5.2% from its current price of $110.67.

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Analysts’ expectations

For 2019, analysts expect Yum! Brands to post revenue of $5.50 billion, a fall of 3.3% from $5.69 billion in 2018. However, in the same period, analysts expect the company’s adjusted EPS to rise 20.6% to $3.82.

Peer comparison

For 2019, analysts expect Domino’s Pizza (DPZ) to post EPS growth of 11.8%, while the EPS of Papa John’s (PZZA) are expected to fall 14.6%.

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