Morningstar

Yum China's Quality Comps Impress

The wide-moat company is one of the best ways to play the improving consumer disposable income trends in the region.

Securities In This Article
Yum China Holdings Inc
(YUMC)

Although retail tax law changes were the key driver behind the 370-basis-point increase in restaurant margins to 23% (and likely pushing full-year restaurant margins to the low to mid-16% range), we now believe the aforementioned digital and delivery initiatives coupled with other in-restaurant staffing and operational efficiencies will push longer-term restaurant margins ahead of management's 17% target. This, in turn, should fuel greater shareholder returns beyond the $300 million share-repurchase authorization (including a potential dividend).

We plan to raise our $33 fair value estimate by a dollar or two to reflect the first-quarter upside and increased top-line outlook for 2017. We view Yum China as modestly undervalued.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

More in Stocks

Our Top Pick for Investing in US Renewable Energy

Utility-scale solar and battery storage installations are poised to set records in 2024.
Brett Castelli

How to Measure a Stock’s Uncertainty

Morningstar’s Uncertainty Rating helps investors understand the risks associated with an investment and how that may influence a decision to buy.
Emelia Fredlick

How to Determine Whether a Stock Is Cheap, Expensive, or Fairly Valued

The Morningstar Rating for stocks gauges how a stock’s price compares with what our analysts think it’s worth.
Emelia Fredlick

About the Author

R.J. Hottovy

Sector Strategist
More from Author

R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

Sponsor Center