Restaurant operator Yum China Holdings Inc (NYSE: YUMC) reported a top-and-bottom-line beat Monday in its fiscal first quarter, prompting Bank of America Merrill Lynch to turn bullish on the stock.
Chen Luo upgraded Yum China from Neutral to Buy with a price target lifted from $43.70 to $50.80.
The bullish case for the restaurant operator that brings American brands to the Chinese market can be justified for five reasons, Luo said in the Tuesday upgrade note.
- The earnings report showed that same-store sales growth accelerated from 2 percent in the fourth quarter to 4 percent. This metric is a "key share price driver" and may signal that the company's initiatives are finding success, the analyst said.
- Pizza Hut recorded its first quarter of positive same-store sales growth since the end of 2017.
- The company has "plenty of buffers" in its arsenal to help prevent margin erosion, Luo said. During the quarter, the restaurant margin rose 0.6 percent year-over-year as rising commodity and labor expenses were offset by same-store sales growth leverage and lower utility costs.
- Yum China stands to benefit from macro factors, including an overall improving economy and the prospects of a finalized trade deal with the U.S., the analyst said.
- Yum China holds a net cash position of more than $1.5 billion, while free cash flow could move north of $600 million per year, Louo said. This implies potential upside to management's three-year goal of returning $1.5 billion to investors.
Yum China shares were trading up 4.84 percent to $46.89 at the time of publication Tuesday.
UBS: Yum China's Growth Fueled By Food Innovation, Digital Initiatives
Potential Bidders For Yum China Walk Away, Shares Fall 15%
Photo by Matt.morris00/Wikimedia.
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