On Monday, BofA Securities updated its outlook on Yum China Holdings (NYSE:YUMC), increasing the price target to $57.50 from the previous $49.00 while reiterating a Buy rating on the stock. The adjustment comes after Yum China reported strong third-quarter results, demonstrating a robust performance with revenue, operating profit, and net profit after tax growing by 5.4%, 14.9%, and 21.7% year-over-year, respectively.
The securities firm has also adjusted its earnings per share (EPS) estimates for 2024 and 2025 upwards by 2% and 3%, respectively. This new valuation is based on higher multiples, reflecting the firm's confidence in Yum China's growth prospects. The analyst highlighted the company's "First In, First Out" strategy, which has led to margin improvements and a reduction in the decline of same-store sales growth.
This approach, alongside Yum China's 'Crazy Four' strategies aimed at driving traffic, expansion, cost control, and shareholder returns, positions the company well against macroeconomic challenges in China.
In addition to the positive earnings outlook, Yum China has increased its shareholder return program for the years 2024 to 2026 from $3 billion to $4.5 billion. This enhancement suggests an annual shareholder yield of approximately 8%, based on a base case of $1.5 billion per year. The company also plans to modify the mix of its franchises, aiming to increase the franchise mix of net new stores to 40-50% for KFC and 20-30% for Pizza Hut over the next few years. This strategic move is expected to bolster franchise economics without hindering the expansion of equity stores.
While short-term risks are noted, particularly in relation to potential market fluctuations following the U.S. elections, BofA Securities views any potential decline in Yum China's stock as an attractive buying opportunity. The analyst's commentary underscores their belief in the company's resilience and potential for continued growth amidst a challenging economic environment.
In other recent news, Yum China Holdings reported impressive third-quarter earnings and revenue, surpassing analyst expectations. The company, which operates KFC and Pizza Hut in China, recorded an adjusted earnings per share of $0.77 and revenue of $3.07 billion, both outperforming estimates. These positive results were driven by robust sales growth and margin expansion.
The company also reported a 4% YoY growth in total system sales, excluding currency effects, mainly due to a 7% net new unit contribution. The company's same-store sales improved, reaching 97% of the prior year's level, marking its seventh consecutive quarter of same-store transaction growth.
In addition to strong earnings and revenue results, Yum China's operating profit rose 15% YoY to $371 million, with an 18% increase in core operating profit. The company's operating profit margin also expanded to 12.1%, supported by resilient restaurant margins and G&A savings.
Moreover, Yum China has been actively expanding its operations with the opening of 438 net new stores in the third quarter, bringing its total store count to 15,861. The company plans to open 1,500-1,700 net new stores by fiscal 2024.
Lastly, Yum China announced plans to increase capital returns to shareholders from $3 billion to $4.5 billion between 2024 and 2026, a significant 50% boost. For 2024, the company aims to return a record $1.5 billion to shareholders through dividends and share repurchases.
InvestingPro Insights
Building on BofA Securities' optimistic outlook for Yum China Holdings (NYSE:YUMC), recent data from InvestingPro provides additional context to the company's financial performance and market position. As of the last twelve months ending Q2 2024, Yum China reported a robust revenue of $11.04 billion, with a revenue growth of 6.77%. This aligns with the strong third-quarter results highlighted in the article and supports the positive earnings outlook.
InvestingPro Tips reveal that Yum China has been aggressively buying back shares, which complements the increased shareholder return program mentioned in the article. The company's high shareholder yield further reinforces its commitment to delivering value to investors. Additionally, Yum China has maintained dividend payments for 8 consecutive years, with a current dividend yield of 1.42% and an impressive dividend growth of 23.08% over the last twelve months.
The company's P/E ratio of 23.42 and PEG ratio of 1.17 suggest that while the stock may be trading at a premium, it's not significantly overvalued considering its growth prospects. This valuation aligns with BofA Securities' increased price target and Buy rating.
For investors seeking more comprehensive analysis, InvestingPro offers 11 additional tips for Yum China, providing a deeper understanding of the company's financial health and market position.
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