Yum China shares fell by -1.7% during the day's morning session, and are now trading at a price of $40.64. Is it time to buy the dip? To better answer that question, it's essential to check if the market is valuing the company's shares fairly in terms of its earnings and equity levels.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Yum China Holdings, Inc. owns, operates, and franchises restaurants in the People's Republic of China. The company belongs to the Consumer Discretionary sector, which has an average price to earnings (P/E) ratio of 22.96 and an average price to book (P/B) ratio of 4.24. In contrast, Yum China has a trailing 12 month P/E ratio of 22.0 and a P/B ratio of 2.57.
When we divideYum China's P/E ratio by its expected five-year EPS growth rate, we obtain a PEG ratio of 0.59, which indicates that the market is undervaluing the company's projected growth (a PEG ratio of 1 indicates a fairly valued company). Your analysis of the stock shouldn't end here. Rather, a good PEG ratio should alert you that it may be worthwhile to take a closer look at the stock.
Growing Revenues With Increasing Reinvestment in the Business:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $8,415 | $8,776 | $8,263 | $9,853 | $9,569 | $10,573 |
| Revenue Growth | n/a | 4.29% | -5.85% | 19.24% | -2.88% | 10.49% |
| Operating Margins | 11% | 11% | 13% | 14% | 7% | 11% |
| Net Margins | 9% | 8% | 10% | 10% | 5% | 8% |
| Net Income (MM) | $736 | $743 | $813 | $1,023 | $478 | $852 |
| Net Interest Expense (MM) | $36 | $39 | $43 | $60 | $84 | $157 |
| Depreciation & Amort. (MM) | $445 | $428 | $450 | $516 | $602 | $474 |
| Earnings Per Share | $1.79 | $1.84 | $1.95 | $2.28 | $1.04 | $1.85 |
| EPS Growth | n/a | 2.79% | 5.98% | 16.92% | -54.39% | 77.88% |
| Diluted Shares (MM) | 395 | 388 | 402 | 434 | 425 | 412 |
| Free Cash Flow (MM) | $863 | $750 | $695 | $442 | $734 | $749 |
| Capital Expenditures (MM) | $470 | $435 | $419 | $689 | $679 | $669 |
| Current Ratio | 1.56 | 1.3 | 2.39 | 1.98 | 1.82 | 1.59 |
| Total Debt (MM) | $194 | $2,228 | $2,712 | $3,379 | $2,876 | $2,949 |
| Net Debt / EBITDA | -0.77 | 0.82 | 1.0 | 1.18 | 1.35 | 1.11 |
Yum China has growing revenues and increasing reinvestment in the business, positive EPS growth, and healthy leverage. However, the firm suffers from weak operating margins with a stable trend and irregular cash flows.
