Buy Yum Brands as it explores sale of Pizza Hut, says Evercore ISI

Evercore ISI upgraded Yum Brands (YUM) to Outperform with a $180 price target, citing the potential sale of its Pizza Hut business as a catalyst for more consistent profit growth and accelerated share repurchases, despite an anticipated initial dip in 2027 EPS. The firm also highlighted strong performance and market share gains from Taco Bell, expecting robust company-owned margins. This positive outlook, which led to a premarket stock increase, contrasts with the majority of analysts who maintain a 'hold' rating on YUM.

Analysis

Evercore ISI upgraded Yum Brands (YUM) to Outperform with a new price target of $180, implying a 20% upside from Tuesday's close. This upgrade follows Yum Brands' announcement of exploring strategic options, including a sale, for its struggling Pizza Hut business. Analyst David Palmer projects that while a Pizza Hut divestiture would initially reduce 2027e EPS from $7.64 to ~$7.10, it would lead to higher and more consistent profit growth.

The firm anticipates that potential proceeds from a Pizza Hut sale, estimated at a low $3 billion valuation, coupled with low capital intensity, could significantly accelerate share repurchases. Furthermore, Evercore is bullish on Taco Bell, noting its success in gaining market share across all income bands, particularly among families and younger consumers. Taco Bell's company-owned margin is estimated to reach 24% for the year, even amidst double-digit beef inflation.

Yum Brands' stock rose over 1% in premarket trading following Evercore's upgrade. However, this bullish outlook contrasts with the broader analyst sentiment, as 21 out of 32 covering analysts currently rate the stock a "hold." This divergence suggests a nuanced view on YUM's future trajectory post-restructuring.

Key Decisions for Investors

• Investors should closely monitor the progress and terms of the potential Pizza Hut divestiture, as it is a key catalyst for future profit consistency and capital returns.
• Evaluate the sustainability of Taco Bell's market share gains and margin performance, particularly in an inflationary environment, as a primary growth driver for YUM.
• Consider the implications of the split analyst sentiment, weighing Evercore's strategic rationale against the majority 'hold' ratings for YUM.