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Yum China (YUMC) Surges 28% In a Year: More Room for Growth?

Zacks Equity Research

Yum China Holdings, Inc. YUMC, 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 #2 (Buy), Yum China is currently a profitable investment choice.

Shares of Yum China have outperformed its industry in the past six months. The stock gained 28% compared with the industry’s rally of 14.6%.

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 earnings in 2019 has been revised upward by 3.8%. Further, the company delivered positive earnings surprise in each of the trailing four quarters, the average beat being 26.2%.

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

Menu & Digital Innovation Aids Top Line

Yum China continues to innovate across menu offerings 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 restaurants and expanding the dessert category. In 2018, the company recorded double-digit growth, and sold over 90 million cups of coffee and became one of the largest coffee retailers in China. Its coffee sales exceeded CNY1 billion by the end of 2018.

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

In the fourth quarter of 2018, delivery represented 19% of sales, up 3% year over year. Delivery services were expanded to 1,188 cities, up from 900 cities in the prior-year period. Mobile payment accounted for roughly 65% of the company’s sales in the reported quarter, marking an increase of 11 percentage points year over year. Digital payments accounted for 86% of sales in the quarter under review, marking an increase of 14 percentage points year over year.

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 $8.8 billion, suggesting 4.3% growth from 2018.

Earnings and Returns Look Promising

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 $1.64, reflecting a 7.2% increase from the past year.

Further, Yum China’s Return on Equity (ROE) for the trailing 12 months is 19.6%, higher than the industry’s 7.5%. This suggests that the company reinvests more efficiently than peers.

Continual Unit Expansion — A Positive

Yum China is focused on relentless unit growth of restaurants to drive incremental sales. In 2018, it opened 819 restaurants and re-modeled 931 stores. This exceeds the company’s prior target of opening 600-650 stores in 2018. 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. It roughly possesses five restaurants per one 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 continued growth of the middle-class discretionary spending.

Solid Financial Position Encourages

Yum China’s balance sheet remained strong, wherein cash and cash equivalents as of Dec 31, 2018, summed $1,266 million compared with $1,059 million as of Dec 31, 2017. Inventories at the end of the fourth quarter were at $307 million compared with $297 million at the end of 2017.

The company has a history of maximizing shareholders’ value. Through dividends and share buybacks, it is continuously enhancing shareholders’ returns amid a competitive industry. During the fourth quarter, the company’s board of directors declared a cash dividend of 12 cents per share on common stock. Additionally, Yum China repurchased 4.4 million shares for $145.3 million.

Other Key Picks

Some other top-ranked restaurant stocks are Starbucks SBUX, Brinker EAT and Darden DRI, each currently carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings for Starbucks, Brinker and Darden for 2019 are projected to increase 12.4%, 10% and 20.2%, respectively.

Zacks' Top 10 Stocks for 2019

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Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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