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Yum Split Boosts Our Appetite for the Firm's Undervalued Shares

We have a favorable view of the firm’s plan to spin off its China division and think both business will benefit from significant competitive advantages, says Morningstar’s R.J. Hottovy.

Confirming speculation following Keith Meister's recent board appointment,

As we've previously stated, we have a favorable view of the separation, as Yum China is a mostly company-owned ecosystem with a self-contained supply chain, distribution, site selection, and advertising infrastructure versus the largely franchised business model in other parts of the world. We believe a separation will create minimal operating disruptions without sacrificing meaningful scale--keeping our wide moat rating intact--while allowing the company to take advantage of a more conducive franchising environment in China. Additionally, we believe a separation will allow investors to better tailor their level of exposure to China and Yum's other emerging markets. We will wait for details regarding leverage and China franchise unit growth plans before finalizing changes to our longer-term cash flow and cost of capital assumptions, but we view the shares as undervalued relative to our $92 fair value estimate (which assumes a stand-alone valuation of $42 for Yum China).

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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