On Wednesday, BofA Securities updated its outlook on Yum China Holdings (NYSE:YUMC) shares, increasing the price target to $49.00 from the previous $41.60, while maintaining a Buy rating on the stock. The revision comes as the analyst forecasts a positive shift in the company's earnings per share (EPS) for the years 2024 and 2025, citing several factors contributing to the optimistic perspective.
The upward adjustment in the price target reflects a 3% and 2% increase in the estimated EPS for 2024 and 2025, respectively. This projection is based on an array of elements including the improving same-store sales growth (SSSG) and margins, the impact of a stronger Chinese yuan (RMB), the company's share buyback program, and the appreciation in the fair value of Yum China's investment in Meituan.
The analyst also noted that Yum China is a first-in, first-out (FIFO) play among China consumer stocks, suggesting that it has minimal risk of an EPS downturn. This is attributed to the nearly 20% cut in fiscal year 2024 consensus net profit since the company's third-quarter earnings miss in 2023, which has already been factored into the stock price. The expectation is that the third-quarter report will indicate a likely low point for SSSG.
Despite acknowledging near-term risks associated with market flows and investor sentiment, particularly around the time of the U.S. elections in early November, the analyst believes any potential decline in Yum China's stock presents an attractive buying opportunity. The price objectives were also raised by 18% both in U.S. dollars and Hong Kong dollars, setting the new targets at $49.00 and HK$380.00, respectively, as the valuation basis shifts from 2024 to 2025.
In other recent news, Yum China Holdings, Inc. reported robust growth in its Q2 2024 results, with a record revenue of $2.68 billion, operating profit of $266 million, and earnings per share of $0.55. The company's system sales increased by 4%, marking a 32% growth from the previous year, driven by operational efficiency and innovative business models like K-Coffee and Pizza Hut WOW.
Yum China also disclosed plans to open 500-600 K-Coffee Cafes and convert 100 Pizza Hut stores to the WOW format by the end of July, targeting over 200 by year-end. In addition, the company intends to return $1.5 billion to shareholders in the near term, maintaining a 3-year growth target of returning at least $3 billion. These recent developments are part of Yum China's commitment to comply with the regulations governing securities listing in Hong Kong and reflect its confidence in its sales initiatives and long-term growth strategies.
The interim results and report for the six-month period ending June 30, 2024, were made public on Tuesday, September 3, 2024, and investors interested in the detailed financials can access the report on the Hong Kong Stock Exchange's news website. The company's stock is traded under the ticker symbol YUMC on the New York Stock Exchange and under the ticker 9987 on The Stock Exchange of Hong Kong Limited.
InvestingPro Insights
The recent analysis by BofA Securities aligns with several InvestingPro metrics and tips for Yum China Holdings (NYSE:YUMC). The company's strong financial position is reflected in its market cap of $16.84 billion and a P/E ratio of 21.15, indicating investor confidence in its future earnings potential.
InvestingPro Tips highlight that YUMC has been aggressively buying back shares, which supports the analyst's mention of the company's share buyback program. Additionally, the tip noting YUMC's strong return over the last three months (with InvestingPro Data showing a 41.18% price total return) corroborates the analyst's optimistic outlook.
The company's profitability is underscored by InvestingPro Data showing a revenue of $11.04 billion in the last twelve months and an EBITDA of $1.549 billion. This financial strength supports the analyst's view of YUMC as a low-risk investment in terms of EPS downturn.
For investors seeking more comprehensive insights, InvestingPro offers 11 additional tips for Yum China Holdings, providing a deeper understanding of the company's financial health and market position.
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