It's time for Yum Brands to get rid of Taco Bell

taco bell

(REUTERS/Sarah Conard)

Spinning off Taco Bell may be one fix that Yum Brands needs right now.

On Tuesday, the fast-food giant reported third-quarter-earnings results. Its profits and revenues missed analysts' expectations, and it lowered its forecast for same-store sales.

Sales at stores open for at least one year in China rose 2%, well below analysts' forecasts for 9.6%.

And it's all about China, where Yum Brands earned about 54% of its sales and said it experienced "unexpected headwinds."

In a note to clients on Wednesday, Nomura analysts said one way the company can remedy this situation and increase shareholder value is by getting rid of Taco Bell altogether and keeping KFC and Pizza Hut.

Here's why:

"As the approximate -16% aftermarket decline in YUM stock shows, though, YUM is a China stock first and foremost, and a solid quarter from Taco Bell isn't something investors care much about in this context. Investors who want to buy shares in a separate Taco Bell — which obtains nearly all of its profits from the U.S. — should be able to do so without being exposed to China-related risks. Investors who want to ride the China roller coaster — and China is improving and likely will continue to improve in Q4, just at a pace slower than we had been anticipating prior to Tuesday afternoon's earnings release — don't seem to care about Taco Bell, which doesn't have any restaurants open in mainland China today to the best of our knowledge. In addition, we believe a fully separate, standalone Taco Bell would have opportunities to be managed well (standalone brands don't have to compete with other brands for a parent company's resources)."

It's all about the uncertainty of whether China's macroeconomic environment would become conducive for Yum Brands. Yum Brands said its growth fundamentals in the country remain unchanged, but Tuesday's comments and results have given investors reason to be more concerned.

And the solution here, according to Nomura, is to get rid of one business that gives investors the least reason to be worried about China.

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