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Bear of the Day: Yum China (YUMC)

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Yum China Holdings, Inc. (YUMC - Free Report) is caught in the crosshairs of a possible US-China trade war. This Zacks Rank #5 (Strong Sell) has sold off in the last month as jitters about trade increased.

Yum China is the largest restaurant chain in mainland China. It started as a single restaurant in 1987 and now operates over 8,100 restaurants in over 1,200 cities and towns.

Formerly a division of Yum! Brands, Yum China was spun off into its own independent company in 2016.

It has the exclusive rights to operate and sub-license the KFC, Pizza Hut and Taco Bell brands in China. It also owns the East Dawning and Little Sheep restaurant concepts outright and acquired a controlling interest in the holding company of in 2017.

Another Beat in Q1

On May 1, Yum China reported its first quarter 2018 results and beat the Zacks Consensus by 4 cents. It reported $0.53 versus the consensus of $0.49.

It was the third beat in the last four quarters.

Revenue rose 15% to 2.2 billion from $1.9 billion.

Same-store-sales, one of the most important metrics in the restaurant industry, rose 3%, with KFC seeing a 5% increase which was partially offset by weakness at Pizza Hut, which declined 5%, excluding F/X.

Restaurant margins also fell to 17.9% from 20.4% in the prior year primarily due to the investment in product upgrades and promotions at Pizza Hut and its sales deleveraging.

Still Growing

But Yum China's sheer size in China is impressive. It has 120 million loyalty program members for KFC, up 50 million year over year. Pizza Hut now has 40 million, up from 20 million a year ago.

Delivery also continues to gain popularity.

Online delivery jumped to 16% o company sales, up from 13% in the prior year period. It's now available in 970 cities, up from 700 cities a year ago.

Estimates Being Cut

With the first quarter mostly being good news, at least for the KFC brand, why is Yum China a Zacks Rank #5 (Strong Sell)?

One estimate for 2018 and 2019 has been cut in the last week.

That has pushed the 2018 Zacks Consensus down to $1.59 from $1.60. The 2019 Zacks Consensus has also fallen to $1.70 from $1.72 in the last 7 days.

It's still earnings growth of 12% and 6.7%, respectively.

Shares Off Big in the Last Month

Investors, however, are more jittery about the trade and tariff implications on the company than they are with the estimate cuts.

Shares have fallen 13% in the last month.

Are they cheap now?

Yum China still trades with a forward P/E of 23.1, so they're still not in value territory.

For investors who want to play the growing Chinese middle class, you might want to consider Starbucks (SBUX - Free Report) . While it may be exposed to trade and tariff issues as well, it's a Zacks Rank #3 (Hold). It's also cheaper, with a forward P/E of 20.9x.

[In full disclosure, the author of this article owns shares of SBUX in her personal portfolio.]

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