Thursday, July 30, 2009

Yum! Brands (NYSE:YUM): Upgraded by Morgan Stanley

Morgan Stanley is out today with an upgrade of Yum! Brands (NYSE:YUM):

Upgrading YUM to Overweight; we consider it to be a core LT holding for large-cap growth investors. YUM’s best-in-class large-cap growth profile (sustainable 10–15% EPS), global exposure (30% of profits come from China & another 20%+ from other developing markets), & cyclically sensitive US business make this a compelling play on recovering global economies. We’re raising 2010e EPS to $2.45 (vs. consensus at $2.36) on rebounding China sales and introducing a PT of $40. We now favor YUM over MCD (see our downgrade, published today) as our top large cap pick as we tilt our recommendations toward an economic recovery. International is the only true large-scale growth opportunity for restaurants, in our view, and YUM, more than MCD, has significant exposure to the world’s largest developing markets.

Drivers of our upgrade: 1. China sales could surprise on the upside in 2H09. Not only do comparisons ease by1,000 bps, but MS’s China retail team expects retail sales to bottom by Sept. /Oct. & to reaccelerate thereafter. Our China economics team has raised its GDP forecast to ~10% in 2010. We expect acceleratingChina sales to lead to EPS upside & P/E expansion. 2. The power of US refranchising is underappreciated, adding 200 bp to ROIC; within 3 years US will likely move from YUM’s largest profit contributor to its smallest3. Improved earnings quality due to the above. 4. Valuation is at a ~14% discount to historical averages and only a slight premium to MCD, despite much better organic growth and with developing market exposure.

Action: I expect YUM to be strong today on these positive comments. China has been hothothot recently and now Morgan Stanley is basically coming out highlighting YUM as another play on it. Their sales team will be busy today calling clients with this one.. and it won't fall on deaf ears.

You can get fills in the pre-mkt at the $34.6-$34.8 levels. I expect the stock to trade above $35.50 today, maybe even touching $36, giving plenty of upside from the pre-mkt levels.

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