Over the past six months, Yum China’s stock price fell to $43.05. Shareholders have lost 10.9% of their capital, which is disappointing considering the S&P 500 has climbed by 11%. This may have investors wondering how to approach the situation.
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Why Is Yum China Not Exciting?
Even with the cheaper entry price, we’re sitting this one out for now. Here are three reasons why YUMC doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Yum China’s sales grew at a tepid 5.2% compounded annual growth rate over the last seven years. This was below our standard for the restaurant sector.
2. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Yum China’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margins are an important measure of a restaurant’s 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 20.3% gross margin over the last two years. That means Yum China paid its suppliers a lot of money ($79.67 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. Following the recent decline, the stock trades at 14× forward P/E (or $43.05 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.
Stocks We Would Buy Instead of Yum China
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