Yum China Holdings Inc (YUMC, Financial) has recently experienced a significant drop in its stock price, with a daily loss of -16.8% and a 3-month loss of -24.48%. Despite this, the stock's Earnings Per Share (EPS) remains at a solid 1.77. This raises the question: is Yum China Holdings significantly undervalued? By delving into a comprehensive valuation analysis, we aim to answer this question and provide valuable insights for potential investors.
Company Snapshot
As the largest restaurant chain in China, Yum China Holdings Inc (YUMC, Financial) boasts almost 13,000 units and USD 10 billion in systemwide sales as of 2022. The company generates revenue through its own restaurants and franchise fees, with key concepts including KFC and Pizza Hut, among others. Despite its current stock price of $43.73 per share, our GF Value estimates the fair value at $67.32, indicating that Yum China Holdings may be significantly undervalued.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. This value represents the fair trading price of the stock, with the stock price typically fluctuating around the GF Value Line. 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.
Given its current price of $43.73 per share and a market cap of $18.10 billion, Yum China Holdings appears to be significantly undervalued according to our GF Value calculation. This suggests that the long-term return of its stock is likely to be much higher than its business growth.
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Assessing Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent capital loss. Therefore, a careful review of 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, which is better than 80.29% of 345 companies in the Restaurants industry. This indicates that the financial strength of Yum China Holdings is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Yum China Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $10.30 billion and Earnings Per Share (EPS) of $1.77. Its operating margin is 10.25%, which ranks better than 79.31% of 348 companies in the Restaurants industry. This indicates fair profitability.
Growth is a critical factor in the valuation of a company. According to GuruFocus research, long-term stock performance is closely correlated with growth. The average annual revenue growth of Yum China Holdings is -0.2%, which ranks better than 54.43% of 327 companies in the Restaurants industry. However, the 3-year average EBITDA growth is -3.8%, which ranks worse than 60.73% of 275 companies in the Restaurants industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can help evaluate its profitability. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (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 exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Yum China Holdings's ROIC was 8.71 while its WACC came in at 6.08.
Conclusion
In summary, Yum China Holdings appears to be significantly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 60.73% of 275 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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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
