Most investors don’t really think of Yum Brands (YUM) as a growth stock. Keith Meister, a disciple of the legendary activist investor Carl Icahn, differs on that opinion. He thinks the YUM stock price can easily tack on another 50% to 90% by the end of next year — if there’s a YUM spinoff.
The spin-ee would be YUM China.
Yum Brands is a fast food powerhouse, with the KFC, Pizza Hut and Taco Bell brands under its umbrella. Is it naive of Meister to think that YUM stock can essentially double through some fancy corporate maneuvering?
Maybe not.
The Scrumptious Opportunity
Although YUM stock’s 18% return over the last year bests the S&P 500 by a full 7 percentage points, there’s definitely still some money on the table.
YUM is hyper-exposed to China in ways that peers like Wendys (WEN), Jack in the Box (JACK) and McDonald’s (MCD) are not — something that might not give investors warm feelings today as China’s growth wanes.
The world’s second-largest economy has been notably decelerating as fears of a bubble mount; first-quarter GDP growth of 7% was the slowest in six years, and a far cry from the 10.4% growth rate China was seeing not so long ago, in 2010.
Still, 7% is nothing to scoff at, and YUM would be out of its mind if it didn’t continue to seek exposure to the world’s fastest-growing middle class. Meister think YUM stock can soar if it only changes the way it manages that Chinese exposure.
Through the end of 2014, 5,301 of the company’s 6,400 Chinese locations were company-owned and operated. Meister wants YUM to put every Chinese store under the umbrella of a separate company, spin that off, and essentially have the Chinese company act as one big franchisee, paying back franchise fees to YUM corporate.
This move would give YUM more leverage because it wouldn’t have to put up the capital to open, close and remodel restaurants in China — it could just sit back and collect a check.
Importantly, YUM China would be a true Chinese business, through and through, which could help with its perceived authenticity. It would also allow leadership in the new company to adapt to cultural shifts that perhaps U.S. execs wouldn’t see as quickly halfway around the world.
The decision not to franchise has held YUM stock back in recent years, says Meister. He points to McDonald’s, who in its recent turnaround plan announced its intentions to focus more on franchising in an effort to reignite growth. Of course, the main reason McDonald’s is so prevalent to begin with is its focus on franchising; 95% of its locations are franchises.
Can YUM stock soar if it spins off its China business? No one ever said no to a huge, guaranteed income stream — Meister estimates it at $200 million annually — and an increased capacity for leverage.
So, what does YUM’s board of directors think about the idea?
“We welcome the input of our shareholders and remain committed to explore all options to enhance long-term shareholder value.”
In other words, never say never.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
