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4 Reasons Why You Should Buy Yum China (YUMC) Stock Now

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On Nov 1, 2016, Yum! Brands, Inc. (YUM - Free Report) announced that it has spun off its all-important China division into an independent, publicly traded company Yum China Holdings, Inc. (YUMC - Free Report) .

Post separation, Yum China holds exclusive rights of the KFC, Pizza Hut and Taco Bell brands in China, and also has the provision to add new brands. At the end of Feb, 2017, Yum China had more than 7,600 restaurants in more than 1,100 cities mostly under the KFC and Pizza Hut brands. Taco Bell too opened its first restaurant in China at the end of 2016. Additionally, Yum China owns the Little Sheep and East Dawning concepts outright. The company is expected to be able to triple its unit count in the long term.

Notably, each of the companies – Yum! Brands and Yum China – is expected to return about 15% annually to shareholders through earnings growth and dividends, after the separation. The spin-off has thus certainly led to the establishment of two powerful, independent companies, each well capitalized with long runways for growth and value creation.

Meanwhile, focusing on Yum China, we can say that the stock has been on a hot run ever since its formation, rising 29.9% in comparison to the Zacks categorized Retail-Restaurants industry’s gain of 17.8%.



We believe that this Zacks Rank #2 (Buy) company has good prospects, given its strong fundamentals and clear growth opportunities, and should thus make a value addition to your portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Why is Yum China a Solid Choice?

Expansion & Other Initiatives: The company’s continual expansion of its geographic footprint in China and existing operational expertise are driving growth. In 2017, Yum China seems to be confident about opening 550-600 new restaurants, while delivering double-digit growth in operating profit, excluding the foreign currency impact. Yum China is also hoping to fuel growth with Taco Bell brands and plans to open more units this year.

Meanwhile, the company has been successful in attracting customers with its loyalty program, digital leadership and more delivery options, thereby driving comps.

Going forward, management believes that with a network of over 4,400 restaurants in its system offering delivery services and roughly 90 million loyalty program members, the company remains poised for continued top- and bottom-line growth.

Growth Prospects: Integration of its brands into Chinese popular culture and consumers' daily lives has been propelling growth at Yum China. Additionally, it is to be noted that a new generation of millennials who are digitally cultured and brand driven are fueling consumption growth in China. In fact, constant growth of the middle class and urban population there is anticipated to create the world's largest market for restaurant brands, with Yum China as the market leader.

Moving ahead, sales growth is projected to be nearly 4%, while earnings per share (EPS) are likely to improve 10.7% in 2017.

Earnings History and Estimate Revision Trend: Yum China has exceeded earnings expectations in both the quarters it has reported so far.

Meanwhile, over the last 60 days, the Zacks Consensus Estimate for Yum China’s current year’s earnings has moved up 4.4%, reflecting three upward revisions versus none downwards. Also, next year’s earnings estimates have inched up 3.2%, on the back of two upward revisions versus no downward revisions. All these positive earnings estimate revisions testifies the unwavering confidence that analysts have in the company and also adds to the optimism in the stock.

VGM Score: Yum China has a VGM Score of 'B'. This score identifies stocks that have the most attractive value, growth, and momentum characteristics. In fact, our research shows that stocks with VGM Scores of 'A' or 'B' when combined with a Zacks Rank #1 or 2 make solid investment choices.

Bottom Line

With no external debt and substantial free cash flow, Yum China has thus by far been successful in delivering strong growth. Given its strong competitive position, the company expects to continue growing its system sales and profit by adding new restaurants and through comps growth, moving ahead.

Stocks to Consider

Other top-ranked stocks in this sector include Restaurant Brands International Inc. (QSR - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) . While Restaurant Brands sports a Zacks Rank #1 (Strong Buy), Darden carries the same Zacks Rank as Yum China.

Restaurant Brands’ earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with an average beat of 7.41%. Meanwhile, for 2017, EPS is expected to grow a solid 20%.

The Zacks Consensus Estimate for Darden’s fiscal 2017 earnings climbed 1.5%, over the last 60 days. The company’s bottom line also surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 3.35%.

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