Oppenheimer: Yum China Takeout Speculation Is Intriguing, But Shares No Longer Undervalued

Oppenheimer analyst Brian Bittner downgraded Yum China Holdings Inc YUMC from Outperform to Perform and removed his $40 price target.

The Thesis

After spinning off from YUM! Brands, Inc. YUM last November, Yum China shares have gained roughly 46 percent, but a elevated earnings risk against consensus estimates through 2019 has forced Bittner to downgrade the stock.

“Recent reports of takeout speculation in China present an interesting angle, but at a 23x forward P/E against elevated near-term operating risks, we no longer view shares as undervalued,” the analyst said in a note.

Bittner asserted the downgrade doesn't impact his positive view on Yum Brands, “given YUM’s lack of exposure to YUMC’s earnings and stock performance."

The analyst says that same-store sales challenges still persist for Yum China for three reasons:

Near-term KFC headwinds don’t appear transitory due to potential macro issues.
Pizza Hut’s revitalization plan is long-term in nature.
Comparisons are tougher for the rest of 2018.

While Bittner said reports of a go-private transaction present an interesting angle, the fundamental outlook and analysis no longer meets Oppenheimer’s outperform rating criteria.

“The debt-free balance sheet and $700-$800 in FCF remain intriguing, but at a 23x forward P/E, we believe risk-reward is not skewed positively,” he said.