BofA Dishes 5 Reasons To Like Yum China

Restaurant operator Yum China Holdings Inc YUMC reported a top-and-bottom-line beat Monday in its fiscal first quarter, prompting Bank of America Merrill Lynch to turn bullish on the stock.

The Analyst

Chen Luo upgraded Yum China from Neutral to Buy with a price target lifted from $43.70 to $50.80.

The Thesis

The bullish case for the restaurant operator that brings American brands to the Chinese market can be justified for five reasons, Luo said in the Tuesday upgrade note.

• The earnings report showed that same-store sales growth accelerated from 2 percent in the fourth quarter to 4 percent. This metric is a "key share price driver" and may signal that the company's initiatives are finding success, the analyst said. 
• Pizza Hut recorded its first quarter of positive same-store sales growth since the end of 2017.
• The company has "plenty of buffers" in its arsenal to help prevent margin erosion, Luo said. During the quarter, the restaurant margin rose 0.6 percent year-over-year as rising commodity and labor expenses were offset by same-store sales growth leverage and lower utility costs.
• Yum China stands to benefit from macro factors, including an overall improving economy and the prospects of a finalized trade deal with the U.S., the analyst said. 
• Yum China holds a net cash position of more than $1.5 billion, while free cash flow could move north of $600 million per year, Louo said. This implies potential upside to management's three-year goal of returning $1.5 billion to investors.

Price Action

Yum China shares were trading up 4.84 percent to $46.89 at the time of publication Tuesday. 

Related Links:

UBS: Yum China's Growth Fueled By Food Innovation, Digital Initiatives

Potential Bidders For Yum China Walk Away, Shares Fall 15%

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