Yum China trades at $42.62 per share and has stayed right on track with the overall market, losing 6.3% over the last six months while the S&P 500 is down 3.6%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Yum China, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Yum China Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Yum China. Here are three reasons why we avoid YUMC and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
Yum China’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.5% per year.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Yum China’s revenue to rise by 4.2%, close to its 4.9% annualized growth for the past six years. This projection doesn't excite us and suggests its newer menu offerings will not accelerate its top-line performance yet.
3. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
Yum China has bad unit economics for a restaurant company, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 20.1% gross margin over the last two years. That means Yum China paid its suppliers a lot of money ($79.89 for every $100 in revenue) to run its business. 
Final Judgment
Yum China isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 15.6× forward P/E (or $42.62 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. Let us point you toward one of our top digital advertising picks.
Stocks We Like More Than Yum China
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