On Tuesday, JPMorgan (NYSE:JPM) made a significant adjustment to its stance on Yum China Holdings (NYSE:YUMC), upgrading the stock from Neutral to Overweight. The firm also increased the price target to $60.00, a substantial rise from the previous $35.50. In the analysis provided, the firm cited several factors contributing to this optimistic outlook.
The firm observed that consumption sentiment in China has been on the decline since the May Golden Week Holiday, leading to reduced industry margins and the exit of smaller players. This has resulted in more rational competition within the sector. Market leaders are seen to be further consolidating their hold on the industry, with Yum China showing a notable positive traffic growth for the past seven quarters and year-over-year margin improvement in the third quarter of 2024, despite a decline in average selling price (ASP) and same-store sales (SSS).
JPMorgan highlighted Yum China's rare achievement in the retail industry, managing to grow amidst challenging conditions through cost-saving measures and efficiency improvements. These strategies have helped counterbalance the negative impact of ASP reductions and sales leverage.
Expectations for Yum China's performance include improved margins due to efficiency gains and lessened competition, as well as a 6-7% stock buyback in 2025 and 2026 that is anticipated to be accretive to earnings per share (EPS). The firm has raised its EPS forecasts for Yum China for 2025-26 by 7-10%.
The revised price target of $60 is based on a discounted cash flow (DCF) valuation, which takes into account an earnings upgrade, lower capital expenditures, improved working capital movement, better earnings visibility and quality, and a lower beta and weighted average cost of capital (WACC).
JPMorgan's new price target suggests a 2025 estimated price-to-earnings (P/E) ratio of 22.7 times, which compares favorably with global peers' P/E ratios of 21-28 times and local peers' 14-16 times, the latter of which reportedly have weaker fundamentals than Yum China.
In other recent news, Yum China Holdings Inc (NYSE:YUMC). reported a robust performance in their third quarter earnings call. System sales grew by 4% year-over-year, with the company's core operating profit seeing an 18% increase, and diluted earnings per share (EPS) rising by 32%.
Yum China's CEO, Joey Wat, emphasized the company's franchise expansion, particularly for KFC and Pizza Hut, resulting in the opening of over 1,200 new stores. The company also unveiled plans to return $4.5 billion to shareholders from 2024 to 2026.
The recent developments include a 21% rise in net income to $297 million, and an improvement in operating profit margin to 12.1%. The franchise mix for new KFC stores increased to 27%, with plans to further accelerate franchise development. Despite traditionally lower sales in Q4, Yum China remains confident in its long-term prospects, expecting to maintain operational efficiency and innovation to drive future growth.
InvestingPro Insights
Recent data from InvestingPro adds weight to JPMorgan's bullish outlook on Yum China Holdings (NYSE:YUMC). The company's market capitalization stands at $18.31 billion, reflecting its significant presence in the Hotels, Restaurants & Leisure industry. Yum China's P/E ratio of 21.4 aligns closely with JPMorgan's projected 2025 P/E of 22.7, suggesting the stock is reasonably valued relative to its earnings potential.
InvestingPro Tips highlight that Yum China has maintained dividend payments for 8 consecutive years, demonstrating financial stability. This is particularly noteworthy given the challenging market conditions described in the article. Additionally, the company's strong return over the last three months, with a 62.86% price total return, indicates growing investor confidence in Yum China's strategy and market position.
The data also reveals that Yum China operates with a moderate level of debt and that cash flows can sufficiently cover interest payments. This financial prudence supports JPMorgan's positive view on the company's ability to navigate industry challenges and potentially increase shareholder value through stock buybacks.
For investors seeking a deeper understanding of Yum China's prospects, InvestingPro offers 13 additional tips, providing a comprehensive analysis of the company's financial health and market position.
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