Key facts
- Morgan Stanley upgraded Yum! Brands to Overweight.
- Morgan Stanley raised its price target to $185 from $180.
- Yum! Brands stock rose 2.3% to $150.
- Taco Bell's Q1 system sales grew 10%.
- KFC's Q1 system sales grew 6%.
- Pizza Hut's Q1 system sales were flat, and operating profit fell 16%.
- Yum! is exploring strategic alternatives for Pizza Hut, including a potential sale.
Morgan Stanley upgraded Yum! Brands to Overweight on Wednesday, raising its price target to $185 from $180, which pushed the stock up 2.3% to $150. Analyst Brian Harbour believes investors are undervaluing the company's growth prospects, technology investments, and the potential upside from changes at Pizza Hut. Yum! Brands reported 15% revenue growth and 72% earnings growth in Q1, but the stock had seen minimal movement this year prior to the upgrade. Harbour noted that Yum! trades at approximately 21.5 times forward earnings, below its five-year average and pre-pandemic levels. Taco Bell demonstrated strong performance with Q1 system sales up 10% and adjusted operating profit up 16%, driven by nearly half of its sales being digital. KFC also saw system sales grow 6% and operating profit increase 9%, with international expansion contributing to results. Pizza Hut, however, experienced flat Q1 system sales and a 16% drop in adjusted operating profit, leading Yum! to explore strategic alternatives, including a potential sale. The company's asset-light franchise model and its technology platform, Byte by Yum, are considered key competitive advantages. Morgan Stanley's $185 price target is based on 24.5 times its 2027 earnings per share estimate.