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3 Reasons Why Investors May Find Yum China Appetizing Now

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Yum China Holdings, Inc. (YUMC - Free Report) , with a robust brand image, focuses on menu innovation, digital enhancement and continual unit expansion to drive top-line growth. With a decent share price appreciation and a Zacks Rank #1 (Strong Buy), the company is currently a profitable investment choice.

Shares of Yum China have outperformed its industry so far this year. The stock gained 26.4% compared with the industry’s rally of 16%.

Moreover, an upward revision in earnings estimates for 2019 reflects analysts’ confidence in the company’s earnings potential. Over the past 60 days, the Zacks Consensus Estimate for its earnings in 2019 has been revised upward by 4.3%. Further, the company delivered positive earnings surprise in each of the trailing four quarters, the average beat being 26.9%.

Let’s delve deeper into other factors that make this stock a solid pick.


Earnings and Returns Encourage

Arguably, earnings growth is of utmost importance for determining a stock’s potential as surging profit levels often indicate solid prospects (and stock price gains).The Zacks Consensus Estimate for the company’s earnings in 2019 is pegged at $1.68, suggesting a 9.8% increase from the past year’s reported figure.

Further, Yum China’s Return on Equity (ROE) for the trailing 12 months is 20.4%, higher than the industry’s 6.5%. This suggests that the company reinvests more efficiently than peers.

Menu & Digital Innovation Aids Top-Line Growth

Yum China holds a leadership position in the China restaurant space when it comes to delivery, mobile order and pay, and loyalty membership. The company is increasingly shifting toward digital and content marketing to expand its customer base. It adopted a high-grade delivery strategy that aids collaborating with aggregators to source traffic and fulfills orders by the company’s KFC riders. This is expected to help the company simultaneously drive volume and leverage the extensive network to control quality.

In the first quarter of 2019, delivery represented 19% of sales, up 3% year over year. Delivery services were expanded to 1,160 cities, up from 972 cities in the prior-year period. Digital payments accounted for 87% of sales in the quarter under review, marking an increase of 13 percentage points year over year.

Coming to loyalty membership, Yum Brands created a robust loyalty program that has more than 120 million loyalty members combining both brands. Backed by delivery and digital sales, the company’s loyalty membership increased at a high-double digit year over year for both brands in 2018. As of Mar 31, 2019, the KFC loyalty program constituted more than 175 million members and the Pizza Hut loyalty program had in excess of 55 million members.

Another riveting growth potential of Yum China resides in its continual menu innovation to encourage top-line growth. KFC’s extraordinary performance is attributable to greater sales of menu offerings like crayfish burger, stuffed chicken wing and spicy chicken burger. Yum China is also serving coffee across its restaurants and expanding the dessert category.

In 2018, it recorded double-digit growth, sold over 90 million cups of coffee and became one of the largest coffee retailers in China. The company’s coffee sales exceeded CNY1 billion by the end of 2018. In the first quarter, it pressed ahead with the crayfish [ph] burger. Meanwhile, Yum China continues to evolve breakfast offerings with new products such as Chinese pancake saobing[ph], congee, panini, rice roll and waffles.

Driven by these major efforts, we expect Yum China’s top line to grow in 2019. Consequently, the Zacks Consensus Estimate for revenues in 2019 is pegged at $8.9 billion, suggesting 6% growth from the figure reported in 2018.

Continual Unit ExpansionAids

Yum China is focused on relentless unit growth of restaurants in order to drive incremental sales. In 2018, the company opened 819 restaurants and re-modeled 931 stores. This exceeds its prior target of opening 600-650 stores in 2018.

In the first quarter, Yum China opened 237 restaurants and remodeled 96 restaurants. Over 80% of Yum China's current portfolio has been remodeled or built over the past five years. For 2019, the company expects to continue driving unit growth, with 600-650 new restaurants. It roughly possesses five restaurants per million people in China, which is expected to grow to 15 stores per million. Moreover, there is ample potential to grow the restaurant base to triple its current size, given the continued growth of the middle-class discretionary spending.

Other Key Picks

Some other top-ranked restaurant stocks are BJ’s Restaurants (BJRI - Free Report) , Chipotle (CMG - Free Report) and Denny’s Corporation (DENN - Free Report) , each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle’s earnings for 2019 are expected to increase 43.2%. BJ’s Restaurants and Denny’s Corporation’s earnings for 2020 are expected to increase 14.2% and 8.2%, respectively.

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