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One of the Most Attractive Consumer Stocks

R.J. Hottovy, CFA

RJ Hottovy: We believe Yum Brands (YUM) offers one of the most attractive investment opportunities not only in the restaurant category, but in the broader consumer industry as a whole.

We have a fair value estimate of $100 per share, and we believe shares are trading at a discount because the market is overlooking several key catalysts on the horizon. The first is a rebound in China same-store sales. Last year, the company faced a supplier issue in China, which led to a mid-teens decline in same-store sales. As we lap that in the back half of 2015, we expect sales to recover to positive territory, and that will help to assuage any market fears about any brand impairment in the region.

Second, most of its brands--KFC, Pizza Hut, and Taco Bell--are now managed at a global level, as opposed to a regional level. I think we're seeing some best-practices sharing across each concept. We've seen a lot of strength in KFC across the globe these past few quarters, and while Pizza Hut U.S. remains a bit of a challenge, we think the company can take some of its best learnings from other regions and apply them to this brand to take corrective measures.

The final catalyst we think the market may be overlooking is the potential separation of Yum China into a publicly traded entity. As things rebound in China, we think that the market may take a closer look at separating this business. This is a case where the company wouldn't be sacrificing a lot of economies of scale by breaking off this business. It is a largely self-contained ecosystem with its own site selection, product development, supply chain, and talent-development capabilities. By doing so, I think it would allow investors to tailor their level exposure to China and Yum's other important emerging markets. I think that this could also be something that gains a lot more discussion in the back half of the year, [becoming a positive catalyst for the company].