Investors with an interest in Retail - Restaurants stocks have likely encountered both Yum China Holdings (YUMC - Free Report) and Shake Shack (SHAK - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
Everyone has their own methods for finding great value opportunities, but our model includes pairing an impressive grade in the Value category of our Style Scores system with a strong Zacks Rank. The Zacks Rank favors stocks with strong earnings estimate revision trends, and our Style Scores highlight companies with specific traits.
Currently, both Yum China Holdings and Shake Shack are holding a Zacks Rank of # 2 (Buy). The Zacks Rank favors stocks that have recently seen positive revisions to their earnings estimates, so investors should rest assured that both of these companies have improving earnings outlooks. However, value investors will care about much more than just this.
Value investors analyze a variety of traditional, tried-and-true metrics to help find companies that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
YUMC currently has a forward P/E ratio of 25.21, while SHAK has a forward P/E of 149.38. We also note that YUMC has a PEG ratio of 2.67. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. SHAK currently has a PEG ratio of 6.64.
Another notable valuation metric for YUMC is its P/B ratio of 5.22. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, SHAK has a P/B of 11.88.
These metrics, and several others, help YUMC earn a Value grade of B, while SHAK has been given a Value grade of F.
Both YUMC and SHAK are impressive stocks with solid earnings outlooks, but based on these valuation figures, we feel that YUMC is the superior value option right now.