YUM Stock: Recent Split Is Simply a Sidetrack

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Yum Brands (YUM) made headlines this week with news that it’s splitting into two companies: Yum Brands and Yum China. YUM stock, which is more or less flat for 2015, has been notably battered of late, losing around 18% of its value since reaching a mid-May high.

 

That recent slide was exacerbated by third-quarter earnings, released earlier this month. Adjusted earnings came to $1 per share, while analysts had been expecting $1.07. The company also lowered its full-year guidance.

Specifics were even more worrisome. Yum Brands has been plagued by Chinese weakness for some time, especially in the wake of a meat supplier scandal and bird flu outbreaks. In the most recent quarter, same-store sales in China were at least in the black … but the 2% year-over-year improvement was well short of both the company’s and analyst expectations of close to 10%.

YUM stock sank almost 19% following the report.

News of the YUM split came not soon after. The two entities will look something like this:

  • Yum Brands is meant to be a more stable stock, focusing on the company’s U.S. business and emerging markets such as India. The goal — as seen by Yum’s recent dividend hike — is to offer investors a more consistent stream of income without having Chinese operations and lease obligations on the balance sheet.
  • Yum China is meant to offer more potential — which naturally (and as we’ve seen) means it comes with more risk. Note that, of late, China has been the main driver of Yum’s business, representing over half of overall operating profit last quarter.

Activist investors have been pushing for such a move for some time in the wake of Chinese weakness.

But despite enthusiasm from experts and investors — YUM stock got around a 5% bump on the news — it’s important to remember that at its core, not much is changing for Yum Brands. Splits and spin-offs (along with, arguably, buybacks) are just ways to remix companies from an investment perspective. It’s a rebranding; few fundamentals are changing.

While Yum China will now be a separate entity, that doesn’t affect the fact that performance in the country has been disappointing, even beyond poultry concerns. Pizza Hut, for instance, has also disappointed investors so far this year. China’s slowing economy and stock market woes remain a question mark at best, and a giant red flag at worst.

As for Yum Brands, there are countless mega-trends working against fast food, and other more promising places to turn if you’re hunting for income.

Neither of these new entities are targeting growing markets or growing industries, and they don’t feature game-changing offerings or ideas. The recently-announced split is simply a result of desperation and a lack of other solutions.

As a result, there’s little added potential for either piece of Yum Brands.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane TraderAbsolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/yum-brands-china-stock-recent-split-sidetrack/.

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