It’s time for Yum Brands to get rid of Taco Bell

Software company Adobe Systems tumbled 5.8 per cent as it projected 2016 earnings of $2.70 per share, well below the $3.19 projected by analysts. The company shuttered four underperforming stores during the quarter. Revenue of $3.4 billion also came in below views by nearly 7%.

Yum! Brands India division sales fell 9 percent on an annual basis while same-store sales growth SSG for 3 brands (KFC, Pizza Hut, Taco Bell) declined by 18 percent from a fall of 4 percent year-on-year.

“As the approximate -16% aftermarket decline in YUM stock shows, though, YUM is a China stock first and foremost, and a solid quarter from Taco Bell isn’t something investors care much about in this context”. Matthews global Capital Management Llc is another very bullish fund who is owning 3.69M shares of Yum Brands or 11.54% of their portfolio.

The way forwardBlum elaborated, however, that the China weakness primarily surfaced in the last few weeks of the third quarter and continued into the fourth quarter so far. The KFC Division recorded a 6% sales increase, including 3% growth in units and 3% in same store sales growth. That fell short of an average estimate of $1.06. Analysts’ estimates typically exclude special items.

Beyond the China market, which admittedly remains the most critical aspect of Yum! This implies a multiple of 8x for the Chinese business, down from 11x.

“Yum also still seems focused on keeping the current corporate structure and leverage position, rather than pursuing radical change, such as a spin”.

It had previously forecast growth of 10%.

That growth suffered a setback in the last few years because of food safety issues in that country. If the recovery is faster than expected, the forecast may prove to be low. The shares were sold at an average price of $77.68, for a total value of $131,201.52. Finally, Credit Suisse reiterated an underperform rating and issued a $86.00 target price on shares of Yum! Brands has a consensus rating of “Hold” and a consensus target price of $91.24.

West noted that the tone of Yum’s conference call, as well as his conversations with investors, suggests the pressure to spin off its business in China (or take other strategic action) will only increase following the dramatic earnings miss. He says in the past, this move could have been a negative catalyst for the stock, but with reset expectations, it appears the stock will not be impacted by the move negatively. This multiple marks a premium to the three-year average multiple of 20x. Zacks raised shares of Yum!