Yum China Holdings Inc (YUMC, Financial), with a daily gain of 4.66% and a 3-month loss of -4.39%, presents an interesting case for value investors. The company's Earnings Per Share (EPS) stands at 1.77. Given these figures, the question arises: Is the stock modestly undervalued? This article offers a detailed valuation analysis of Yum China Holdings (YUMC), providing insights that could be critical for your investment decisions.
Company Introduction
Yum China Holdings Inc (YUMC, Financial), the largest restaurant chain in China, boasts nearly 13,000 units and $10 billion in systemwide sales in 2022. The company generates revenue through its own restaurants and franchise fees, with key concepts including KFC, Pizza Hut, and other brands such as Little Sheep, East Dawning, Taco Bell, Huang Ji Huang, COFFii & Joy, and Lavazza. Yum China Holdings is a trademark licensee of Yum Brands, paying 3% of total systemwide sales to the company it separated from in October 2016. With a current stock price of $57.69 and a market cap of $23.90 billion, the company's valuation needs a closer look.
Understanding GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is computed based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line denotes the fair value at which the stock should ideally trade. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to our analysis, Yum China Holdings (YUMC, Financial) appears to be modestly undervalued. Given its current price of $57.69 per share and a market cap of $23.90 billion, the stock seems to offer a promising return potential.
Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Thus, understanding a company's financial strength is crucial before deciding to buy its stock. Yum China Holdings has a cash-to-debt ratio of 1.33, better than 80.23% of 349 companies in the Restaurants industry. The overall financial strength of Yum China Holdings is ranked as fair by GuruFocus.
Profitability and Growth
Investing in profitable companies carries less risk, especially those demonstrating consistent profitability over the long term. Yum China Holdings has been profitable 9 years over the past 10 years. Its operating margin of 10.25% is better than 79.83% of 352 companies in the Restaurants industry. However, the growth of Yum China Holdings, a crucial factor in valuation, is not as impressive. The 3-year average annual revenue growth of Yum China Holdings is -0.2%, ranking better than 56.67% of 330 companies in the Restaurants industry. However, the 3-year average EBITDA growth rate is -3.8%, ranking worse than 60.65% of 277 companies in the Restaurants industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Yum China Holdings's ROIC was 8.71, while its WACC came in at 5.56.
Conclusion
In conclusion, the stock of Yum China Holdings (YUMC, Financial) shows every sign of being modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 60.65% of 277 companies in the Restaurants industry. To learn more about Yum China Holdings stock, you can check out its 30-Year Financials here.
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