Business as Usual for Wide-Moat Yum in Q3; We Expect Little Change to Long-Term Forecasts

Wide-moat Yum Brands posted earnings a touch behind our expectations, with $1.64 billion in revenue and $1.09 in adjusted EPS missing our $1.77 billion top-line and $1.23 EPS estimates, largely attributable to stouter-than-anticipated currency headwinds that posed an 8% drag on operating profit. We're impressed by the firm's resilience against a difficult macroeconomic backdrop, with the Yum enjoying positive comparable store sales at each of its three largest units—KFC, Taco Bell, and Pizza Hut—and continuing to post impressive unit growth (3.5%, inclusive of the disaggregation of 1,112 KFC and 53 Pizza Hut units in Russia), despite declining traffic industrywide and persistent permitting and procurement issues, the latter of which should abate in the next few quarters. As we digest quarterly results, we plan to raise our $122 fair value estimate by roughly 4%, with better-than-expected international development results in the Taco Bell division driving a slightly larger increase than the roughly 2% lift from time value. Shares look fairly valued.