Stifel analyst Chris O'Cull downgraded shares of both Yum! Brands (YUM) and Papa John's (PZZA). Yum! was downgraded to "Hold" from "Buy," though the price target was left unchanged at $135. O'Cull blames a lack of catalysts for the stock as a reason for the downgrade. Papa John's rating was cut from "Hold" to "Sell," with an unchanged price target of $65. Some of the concerns O'Cull has about the pizza chain include the turnaround of the company's UK business and domestic comp sales growth.
Watch the video above to hear Yahoo Finance's Brooke DiPalma break down the report, including the stocks O'Cull is bullish on.
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Editor's note: This article was written by Stephanie Mikulich
Video Transcript
[AUDIO LOGO]
MADISON MILLS: We're watching shares of fast food giants, Yum! Brands and Papa John's, after Stifel hit both stocks with downgrades. Yahoo Finance's Brooke DiPalma has the details for us. Hey, Brooke.
BROOKE DIPALMA: Good morning. That's right, Stifel analyst, Chris O'Cull, saying in a note that he's downgrading shares of Yum! to hold from buy. Now he cited that Yum! would benefit from franchisees raising menu prices to combat inflation. But Yum! Brands is still lagging behind competitors, McDonald's and Chipotle, which both had stellar quarters in their last quarterly results, beating expectations on the Street.
Now he expects fewer catalysts for shares of Yum! Brands in 2024. He noted three top concerns. He expects US comp sales to likely moderate with less pricing. He also noted international markets are expected to remain soft. And he noted another year of above average unit growth.
Now the Street is expecting unit growth of 5.7% this year. That's compared to 5.9% in 2023. And he noted that without accelerating comp sales performance, they just don't see much upside to the Street's earnings per share estimates come next quarter.
Now in addition to that, another stock that he also downgraded with shares of Papa John's to sell from hold, he said that it's looking a bit, well, over baked. I like that analysis. Three concerns that he had there was he expects net unit growth to fall short of Street expectations for 2024, citing less development in the UK and development in China that could moderate as well.
Another concern is domestic comp sales growth falls short of expectations. And his top concern here is the turnaround of the UK market. He said that could take several quarters to gain traction. But Seana and Mady, last time I spoke with Rob Lynch-- that's the CEO of Papa John's-- he did note that the UK is more of a long-term strategy for them.
SEANA SMITH: Brooke, there are some reasons here, at least in the terms of through Stifel's eyes, that we should be a little bit concerned about some of these fast food players. He was, though, a fan of a couple of names. Who does he think is best positioned then?
BROOKE DIPALMA: Yeah, so newcomers to the market. Cava is one of them, in addition to Wingstop and Domino's Pizza, of course, a long time player there. He noted that he sees attractive unit economics there. So for example, Cava continues to see improved average unit volume.
Last quarter, they saw a 2.6 million for their average unit volume. And two others that he liked here was Darden Restaurants and Brinker International. He noted compelling risk reward propositions with strong momentum behind their same restaurant sales. He also noted strong cash flows and balance sheet optionality. So definitely, some to watch there, but also some to be a bit cautious of as well.
SEANA SMITH: All right, Brooke. Thanks so much for breaking all of that down for us.
