What Partnership With GrubHub Means for Yum

Although Yum’s (YUM) fourth-quarter update was uncharacteristically busy with the announcement of a partnership with GrubHub and one-time items expected to impact operating profit growth in 2018, we believe investors should walk away confident that the company’s longer-term cash flow growth story and wide moat remain intact.

The highlight of the quarter is Yum's partnership with GrubHub, which will allow for online ordering for pickup and delivery at KFC and Taco Bell locations in the U.S. In addition, Yum will purchase $200 million of GrubHub's common stock, with Pizza Hut U.S. president Artie Starrs also joining the GrubHub board. We believe this plays into increasing demand for delivery across a wider range of food options, while offering KFC and Taco Bell a quick way to add incremental transaction growth (similar to the increasing transaction growth McDonald's is seeing with its UberEats partnership) as well as unique data on the broader restaurant delivery landscape.

That said, the announcement should not overshadow solid fourth-quarter fundamentals, including positive comps at each brand (3% KFC, 2% Taco Bell, and 1% Pizza Hut) and core operating profit growth excluding refranchising activity and Pizza Hut U.S. transformation investments. Yum has laid out reasonable guidance for 2018, including 2-3% comps, 3%-4% unit growth (a slight acceleration from 2017), and 5%-6% system sales growth. While reported core operating profit is expected to be flat, there will be a 6-7 point hit for G&A timing tied to refranchising activity and 2-3 points due to franchisee fees revenue recognition changes. This will not alter our medium-term core operating profit growth (high-single digits) or total shareholder return outlooks (15%-plus with plans to return tax reform savings to shareholders). We're planning a modest increase to our $82 fair value based on time value of money and a lower effective tax rate, and believe current market volatility could create a buying opportunity.

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