In a slate of new initiations across restaurant operators, Wells Fargo analyst Zachary Fadem selected Yum! Brands (NYSE:YUM) as a “signature pick” in the space.
“YUM is among the best defensive growth stories in consumer, with accelerating comp/unit growth, sizable white space, margin upside, and scale benefits across 3 major banners,” he advised clients on Tuesday. “YUM trades modestly below MCD on a P/E basis, and we view the company uniquely positioned to play both offense and defense in any macro environment.”
On the offensive end, a recovery in China is seen as a significant tailwind. Meanwhile, on defense, the franchise model and diversification across three brands is seen as providing downside protection. In particular, he sees continued upside for the Taco Bell brand.
“Taco Bell’s best-in-class menu innovation, digital focus, and heightened value proposition is winning,” he commented. “The business has peer high Restaurant margins (~24%), no direct peer of its magnitude, and appears well-positioned for ongoing comp momentum and accelerating unit growth. Beyond its core, we see upside opportunities with 100M casual customers, underpenetrated breakfast/lunch dayparts, and vast international white space that’s just getting started.”
Given these dynamics, Fadem started coverage of the stock at Overweight and assigned it Signature Pick status, indicating a high level of conviction. A $145 price target was set for the stock.
Read more on Fadem’s thoughts regarding McDonald’s.