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Correction Presents Good Opportunity By TipRanks


© Reuters. Yum China Stock: Correction Presents Good Opportunity

Yum China (YUMC) stock surged to its 52-week high of $69.67 on June 2. The stock saw some improvement.

A recent announcement that the company’s adjusted operating profit is likely to be 50% to 60% lower in Q3 2021 accelerated the downside. The downward revision of growth estimates has resulted from the reemergence of COVID-19 in China.

Yum China stock is a good investment. However, the headwinds are temporary as Yum China’s long-term growth plans include aggressive store expansion. (See YUMC stock charts on TipRanks)

Aggressive Store Expansion

The pandemic is likely to impact the company’s expansion in Q3 2021. Yum China has long-term goals, however.

The company has opened 404 stores since Q2 2021. In the past 12 months, 1,069.

Yum China also has entered 100 cities over the past 12 months. There is great potential to expand with the large market penetration and attractive payback periods.

Store openings resulted in healthy revenue growth. Yum China’s first half of 2021 saw 37% revenue growth year-over-year.

Yum China announced recently that Lavazza and Lavazza will be accelerating China’s economic growth. This partnership intends to open 1,000 new stores by 2025.

These two key factors, in addition to the aggressive opening of stores, are expected to increase growth and improve margins.

The company is focusing on growth across all channels. KFC delivered 29% and Pizza Hut 35% of their total sales. The company’s same-store sales growth was 8% for the first half of 2021. It’s likely that same-store sales growth will remain strong.

Yum China also focuses on innovation within its brands. The company, for example, had modified 40% of Pizza Hut’s menu items in March 2021 on an annual basis.

Similar to KFC, KFC has been focusing on catering local taste buds. These initiatives already have produced higher sales in comparable stores.

Strong Financial Profile

As of Q2 2021, Yum China reported $4.3 billion in cash and equivalents. In addition, Yum China reported an operating cash flow of $470 million for the first 2 quarters of this year.

This gives the company ample flexibility to grow aggressively while increasing shareholder returns. It’s worth noting that Yum China resumed cash dividends in Q4 2020. Due to the expansion plan, there’s a good chance of continued dividend growth.

Yum China continues to be active in the area of merger and acquisition. In the last year, Huang Ji Huang was acquired by Yum China.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, YUMC stock comes in as a Moderate Buy, with four Buys and one Sell assigned in the past three months.

The average YUMC share price target of $70 is a sign that there’s 18.7% upside potential compared with current levels.

Bottom Line

Yum China’s growth is likely to witness a temporary pause due to the pandemic headwind. But, the longer-term outlook for Yum China remains positive. The company plans to open 1,300 stores by 2021.

Multichannel sales and greater store penetration are likely to increase top-line and earnings growth. A dynamic menu will likely increase the average ticket size and sales growth in same-store stores. The operating margin will trend upwards over the coming years.

Yum China stock looks therefore attractive, especially after the recent correction.

Disclosure: Faisal Humayun didn’t hold any positions in the securities discussed in this article at the time it was published.

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