Yum! Brands (YUM) - Get Report stock has gained about 8.2% in 2016, outperforming McDonald's 4.2% rise and the 0.5% uptick on the Dow Jones Industrial Average. McDonald's stock lagging Yum! Brands is hardly an indictment on the Golden Arches performance, which was again impressive in the first quarter amid continued popularity in all-day breakfast and several new value deals.
It's just that Yum! Brands may have some powerful tailwinds at its sails this year about which investors are starting to get excited.
The first is Yum! Brands spinoff later this year of its China division, setting up a potentially more lucrative business model for the company over the long term. Yum! China will be an independent company when the spinoff is completed later this year, holding exclusive rights to use the KFC, Pizza Hut and Taco Bell brands in China, with the opportunity to add or launch new brands in China on its own.
Yum! China will pay Yum! Brands a license fee of 3% of its sales for KFC, Pizza Hut and Taco Bell in China. The remaining company, led by current CEO Greg Creed, will continue to expand and develop Taco Bell, KFC and Pizza Hut in the U.S. and internationally outside of China.
"People think we are shedding China, and that is not true at all. We are at that point where we have an opportunity to drive more value," explained Yum! Brands Chairman David Novak in a recent interview with TheStreet, adding, "I plan on keeping my stock in both companies. I think we have great upside."
Said J.P. Morgan analyst John Ivankoe in an April 26 note to clients, "Fundamental inflection is expected in China as management is willing to consider an accretive transaction in breaking up the company -- given the intrinsic value we estimate implied by such a transaction relative to the current stock price, we are comfortable with an overweight rating."
Leading up to the spinoff, Yum! Brands has become an aggressive acquirer of its stock, which has helped to boost earnings per share while sending a signal to investors that shares may be undervalued. Since Yum! Brands announced in October 2015 its intention to separate the China business, the company has bought back 24.7 million shares at an average price of $71, returning a total of $1.8 billion to shareholders. The company expects to complete an additional $4.4 billion in stock repurchases in the second half of the year. Yum! stock trades at $79.52.
Additionally, two of Yum! Brands key businesses have started to turn the corner after struggling for most of last year.
Amid aggressive marketing around affordable pizza, Pizza Hut U.S.'s same-store sales gained 5% in the first quarter, following a 2% increase in the fourth quarter of last year. Same-store sales sales at Yum! China rose 6%, led by a 12% increase at KFC. Pizza Hut China saw same-store sales fall 12% as execs continue to work toward improving the menu and marketing in the competitive China fast-food sector.
The sales increase in China likely gives investors hope the business will perform reasonably well in the quarters before the spinoff.