10 Undervalued Cyclical Stocks to Buy According to Analysts

5. Yum China Holdings, Inc. (NYSE:YUMC)

Forward PE ratio as of September 11: 13.18

Average Analyst Price Target Upside Potential: 41.98%

Number of Hedge Fund Holders: 24

Yum China Holdings, Inc. (NYSE:YUMC) is one of the undervalued cyclical stocks to buy, according to analysts, as the Chinese economy shows signs of recovery heading into year-end. The company operates and franchises restaurants in China. It also operates V-Gold Mall, a mobile e-commerce platform to sell products, and offers online food delivery services.

Yum China Holdings, Inc. (NYSE:YUMC) delivered solid second-quarter financial results that show it is benefiting from a growing Chinese economy. Revenue in the quarter was up 1% year over year to $1 billion, hitting a new quarterly record. Its adjusted net income rose to $212 million from $197 million a year ago. The company continued its rapid expansion, adding 401 new locations in the quarter, bringing the total to 15,423.

The robust Q2 2024 results demonstrate robust growth and strategic efficiency. It also revealed intentions to open between 500 and 600 K-Coffee Cafes and transform one hundred Pizza Hut outlets into the WOW model as part of its expansion plan. Yum China Holdings, Inc. (NYSE:YUMC) also stated its desire to allocate $1.5 billion back to its investors in the near future while keeping a 3-year growth objective of returning a minimum of $3 billion through sustainable expansion.

Yum China Holdings, Inc. (NYSE:YUMC)’s price-to-earnings ratio stands at 13, which indicates a fair valuation compared to its earnings.

According to Insider Monkey’s database, 24 hedge funds held stakes in the company by the end of Q2 2024. Yum China Holdings, Inc. (NYSE:YUMC) is rated as a buy based on consensus estimates of 9 Wall Street analysts with an average price target of $48.26, implying 41.98% upside potential.

In their Q4 2023 investor letter, Baron Funds explained why Yum China Holdings, Inc. (NYSE:YUMC) declined. Here’s what the firm mentioned:

“Yum China Holdings, Inc. (NYSE:YUMC) is the master franchisee for the YUM brands in China and operator of the KFC and Pizza Hut restaurant networks in that market. Shares detracted after the company reported a negative surprise on margins for the third quarter and hinted that increased competition and cost-consciousness among Chinese consumers could cause that margin compression to continue through the first quarter of 2024. Although in-year margins are volatile at Yum China, its pristine balance sheet, cumulative investments in technology, unmatched scale, and successful pivot to higher-ROI, smaller footprint stores in recent years should drive continued 8% to 10% store growth at attractive returns. Further, given its strong free-cash-flow generation and strong balance sheet, we believe the company is likely to offer capital returns to shareholders in excess of earnings over the next several years. We remain shareholders.”