On Monday, Morgan Stanley revised its outlook on Yum China Holdings (NYSE:YUMC), reducing the price target to $56 from the previous $61 while maintaining an Overweight rating. The adjustment follows a reassessment of the company's earnings projections amid a tepid consumer spending environment.
The firm's analyst indicated a 2% decrease in the 2024 recurring earnings per share (EPS) estimate, attributing this to modestly lower revenue expectations and a subdued same-store sales growth (SSSG) forecast for the second quarter.
The revised estimates also reflect a 4% and 6% reduction in the EPS for 2025 and 2026, respectively. These changes stem from a lower 2024 base and more prudent assumptions about restaurant margins, which may be impacted by potential promotional activities.
In line with the EPS adjustments, Morgan Stanley also scaled back its earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates for the period of 2024 to 2026 by 2% to 6%. The new price target is based on a lower enterprise value to EBITDA (EV/EBITDA) multiple of 12 times, compared to the prior 13 times.
This reflects a higher discount relative to the benchmark average 2024 EV/EBITDA of 17 times for Global Master Franchisee peers, which include McDonald's (NYSE:MCD), Yum! Brands (NYSE:YUM), Starbucks (NASDAQ:SBUX), and Domino's Pizza (NYSE:DPZ).
The firm now applies a 5 times discount to the peer average EV/EBITDA, an increase from the previous 4 times, to account for a higher China risk premium. Moreover, the updated price target incorporates the firm's reduced EBITDA forecast for 2024. Morgan Stanley also presented new valuation scenarios, setting a bull case value at $70, down from $74, and a bear case value at $27, previously set at $30.
In other recent news, Yum China Holdings, Inc. reported a strong first quarter in 2024, with system sales growing by 6% year-over-year to reach a new high of $3 billion. The company also returned a record $745 million to shareholders through share repurchases and dividends. Yum China launched an aggressive expansion strategy, opening 378 new stores and surpassing 15,000 stores globally, with plans to add 5,000 more by 2026.
The company's future plans include opening 1,500 to 1,700 new stores in 2024 and returning $1.5 billion to shareholders. Yum China also initiated Project Fresh Eye, an endeavor aimed at improving operational processes and efficiency with AI technology.
On the downside, the company expects average check to be a headwind to same-store sales due to a high base from last year and intense competition in the industry remains a challenge. Still, the company is expanding to premium outlets and partnerships for fresher beans and cost efficiency, while also seeing a strong recovery of Chinese dining brands Little Sheep and Huang Ji Huang.
These recent developments reflect Yum China's strategic focus on operational efficiency, digital capabilities, and consumer demand diversification, which has allowed it to maintain a stable core operating profit and solidify its position in the fast-food industry.
InvestingPro Insights
As Yum China Holdings (NYSE:YUMC) navigates through a challenging consumer spending environment, recent data from InvestingPro provides a mixed picture. The company's P/E ratio stands at a modest 16.11, suggesting a reasonable valuation relative to its earnings.
Notably, the stock is trading near its 52-week low and the RSI indicates it is in oversold territory, which could attract investors looking for potential value buys. Moreover, Yum China has maintained a consistent dividend for 8 consecutive years, with a current dividend yield of 1.98%, reflecting a solid commitment to returning value to shareholders.
InvestingPro Tips highlight that management's aggressive share buybacks and a high shareholder yield are points of interest for potential investors. The company is a prominent player in the Hotels, Restaurants & Leisure industry and has shown it can sufficiently cover its interest payments with its cash flows.
For readers seeking a deeper dive into Yum China's financials and strategic positioning, InvestingPro offers additional tips and insights. To explore these, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 11 additional InvestingPro Tips available that can further inform investment decisions regarding YUMC.
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