In advance of its annual investor meeting on Dec. 6, Yum Brands (YUM) updated its fourth-quarter expectations, introduced 2013 forecast (including 10% earnings per share growth excluding one-time items, implying EPS of at least $3.56), and reaffirmed several components of its "ongoing" growth assumptions (including long-term operating profit growth of 15%, 10%, and 5% in the China, YRI, and U.S. segments, respectively). Weak sales trends in China--where same-store sales are now expected to decline 4% during the fourth quarter, a considerable change from management's most recent guidance calling for flat to low-single-digit growth--are rightfully garnering much of the attention from management's updated outlook.
However, we largely view these trends as cyclical in nature and consider the long-term segment goal of same-store sales growth in the mid-single-digit range as achievable over a longer horizon as a result of increased discretionary spending among lower- to middle-class Chinese consumers as well as the continued maturation of units in lower-tier cities. We believe the China results (where the company will generate 45% of its operating profit this year) may take the market's focus off the considerable margin expansion potential in Yum's other segments, and we believe today's sell-off may offer an opportunistic entry point for longer-term investors. We plan to adjust our model based on the updated fourth-quarter outlook and preliminary 2013 guidance, but still firmly believe management's long-term revenue and margin goals support our $70 fair value estimate, which is unchanged.
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R.J. Hottovy does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.