Goldman Sachs Upgrades Yum! Brands to Buy, Removes Chipotle from Conviction List

Goldman Sachs analyst Jared Garber made changes in the bank’s research coverage of Americas Restaurants.

The analyst is taking a more defensive approach into the second half of the year amid a more challenging macro environment. The analyst reminds investors that restaurant sales trends are “highly correlated to macro/consumer spending growth, and current macro forecasts imply lower SSS trends in 2H.”

Along these lines, Garber removed Chipotle Mexican Grill (NYSE: CMG) from the bank’s Conviction Buy List, but remained Buy-rated.

“We continue to see Chipotle as one of the strongest restaurant growth stocks (and, notably, already at scale) with pricing power and a strong menu innovation pipeline to drive SSS, a sustainable HSD unit growth algo, and one of the best digital ecosystems in the industry; however, risks from a softer macro backdrop and continued cost pressures (commodity/labor) make incremental margin algo harder to achieve,” Garber wrote in a research note.

The analyst also downgraded Brinker International (NYSE: EAT) to Neutral from Buy given the company’s strong relationship to GDP/Consumer DCF growth.

On the other hand, Garber raised Yum! Brands (NYSE: YUM) to Buy for several reasons, namely:

1. YUM’s strong unit growth opportunity and high franchise mix (98% of units);
2. Improved digital integration (across brands, and at enterprise level);
3. Trade-down benefit at Taco Bell (23% of system sales);
4. Lower-risk China re-opening opp'y (China ~14% of EBIT, but lower sensitivity to SSS due to franchise); and
5. Attractive valuation.

YUM shares are up over 3% in premarket Monday on Goldman’s upgrade.

By Senad Karaahmetovic

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