What Corvex And Third Point Find So Damn Tasty At Yum! Brands by Activist Stocks

Just a quick update – We’re gearing up for the official launch of Activist Strategy; figuring out the features, frequency, etc. has been tricky. We’ll also be releasing our first precog feature (identifying stocks that an activist might target) later tonight or first thing in the a.m.

Yum! Brands is Keith Meister and Corvex Management’s second largest position, but we won’t know how large Loeb’s is for another couple weeks, but he calls it significant. In any case, the big thesis is to spinoff Yum!’s Chinese operations.

For many, the notion of splitting up Yum! has been well known and well circulated — namely the partial spinoff of its China operations, which would trade on the Chinese exchange. Two different markets, two different customers, two different business models, two different investor bases. Yum! China owns 80% of its stores, with the rest of Yum! operating as a 90%+ franchised business model.

Per the Sohn Conference, Meister’s core thesis is to spin off the Chinese operations and then allow it to enter into a franchise agreement with the U.S. operations. And per Corvex, the upside is to $130 in the least, and $160 if China recovers quicker than expected; suggesting 45% to 75% upside. He loves the idea of being able to invest in a China-focused Yum!, where the company already gets 40% of its operating income. China does appear to be stabilizing, with 1Q comps showing sequential improvement since the 2014 safety concern. Then, you add in the fact that China has a bustling middle class, and being heavily invested in China is good for growth.

Loeb’s thesis, per his letter, is more about the turnaround of China and how Yum! is still a well known brand that can start re-attracting customers. There’s also the idea that there’s plenty for Pizza Hut and KFC U.S. to do to juice returns

Interesting tidbits where Yum! needs to close the gap:

  • Its average China KFC brings in $1.3mm today with a 15% operating margin, versus the $1.7mm and 20% margins they had before the 2012 safety concern.
  • KFC generates $1.2mm/unit with a 13% restaurant-level operating margin. Popeyes generates $1.6mm/unit at 19% margins, Bojangles does $1.8mm/unit at 18% margins and Chick-fil-A does $3mm/unit. The fix includes adding more chicken sandwiches (look at Chick-fil-A’s success) and enter the late night and breakfast categories.
  • Pizza Hut is trying to be a casual dining concept while also offering delivery, which isn’t working. Domino’s is killing them in delivery. Pizza Hut is pulling in $0.8mm/unit with 8% restaurant-level operating margins. Domino’s is doing the same revenue per unit, with much smaller stores and margins of 23%. Digital and small box delivery models should be Pizza Hut’s focus.

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