(MONEY Magazine) – TRICON GLOBAL RESTAURANTS (YUM) NYSE, $34.50; NO DIVIDEND

PepsiCo has long been the Rodney Dangerfield of the beverage biz. For nearly a century, the $21 billion company has lagged behind soft-drink giant Coca-Cola: Pepsi annually sells less than $11 billion in beverages vs. Coke's $18.9 billion. Last fall, in an effort to close that gap, PepsiCo spun off its fast-food restaurants to shareholders so that management of both companies could better concentrate on building their respective businesses. Analysts now say the superior investment is not PepsiCo but that new company, $9.6 billion Tricon Global Restaurants, which operates and franchises more than 29,000 Kentucky Fried Chicken, Pizza Hut and Taco Bell restaurants worldwide.

"Tricon looks to be a classic spin-off success story," says Anton Brenner, a director of equity research for UBS Securities in New York City. "Independence ought to allow management to focus more clearly on growing and improving the bottom line." Indeed, in December, Tricon announced a $425 million after-tax charge against earnings to pay for the closing of 741 underperforming Pizza Hut and KFC units in the U.S. and abroad.

Over the next five years, analyst David Trossman of BT Alex. Brown in Baltimore expects Tricon to spruce up its balance sheet by annually selling as many as 700 of its weakest-performing restaurants to franchisees. Currently the Louisville company owns a whopping 45% of the roughly 20,000 KFC, Pizza Hut and Taco Bell restaurants in the U.S. In comparison, McDonald's owns 16% of its 12,100 U.S. restaurants, and Burger King controls 10% of its 7,400 domestic units.

Trossman expects Tricon's franchise sales to generate roughly $350 million annually over four years, enabling the firm to pay down a third of its $4.8 billion in debt during the next five years. "That will improve the bottom line by lowering the company's interest payments $25 million a year," he says.

In addition, analysts predict that the sales will widen Tricon's profit margins, now 3% vs. the 9.9% industry average. Explains analyst Jack Russo of A.G. Edwards in St. Louis: "Franchised units tend to be more profitable than company-owned ones, because the owners have a better feeling for their markets and a bigger financial stake in pleasing the customer." And as the franchises' sales increase, so too will Tricon's 4% royalties.

Although December's write-off will lower Tricon's 1997 earnings by an estimated 47% to $1.27 a share, Brenner predicts that the new franchises--along with new menu items like KFC's Tender Roast Chicken--will lift profits 65% to $2.10 a share in 1998. Trossman expects the earnings gains to boost Tricon stock as much as 21% to $42 within a year.

--Gary Belsky