We recently published a list of 11 Best Fast Food Stocks To Invest In Right Now. In this article, we are going to take a look at where Yum China Holdings, Inc. (NYSE:YUMC) stands against other best fast food stocks.
Fast food is integral to American culture and remains popular among adults and children. According to a report by the CDC, one-third of Americans consume fast food every day, while 83% of the country’s families dine out at a fast food restaurant at least once a week. Around 45% of the population aged between 20-39 consume fast food every day, while the indulgence rate of those between 40-59 years of age is slightly lower at 37.7%. On the other hand, 34% of children regularly eat fast food daily.
READ ALSO: 7 Cheap Food Stocks to Buy According to Analysts.
However, an increasing number of Americans are beginning to pull down on their consumption and eating less fast food per week due to high prices. A survey by Lending Tree in May 2024 highlighted that about 78% of the citizens consider fast food a ‘luxury’ after rampant inflation in the country has forced Americans to reassess their spending habits. Surge pricing in restaurants has also added to their worries, with about 72% confessing that they would prefer having fast food during discount hours.
Over the past year, menu prices have risen considerably in the US across the wider restaurant industry, driven by increased commodity and supply chain costs. This has boosted consumer desire in the country to eat at home. Carnegie Investment Counsel’s portfolio manager, Razmig Pounardjian, stated the following to Reuters in May:
“The lack of value offers has opened up consumers to shop for different options whether it be other (chains) or the grocery stores.”
Despite challenges, the American restaurant industry remains resilient, primarily because it adapts well to changing consumer habits. The National Restaurant Association has forecast sales to top the $1 trillion mark in 2024 for the first time. It also expects the industry to create 200,000 new jobs, citing what is generally a strong demand from Americans to eat at restaurants.
A restaurant ETF issued by AdvisorShares, which invests exclusively in the restaurant and food industry has gained 18.32% YTD, outperforming the broader market by over six percentage points, as of the close of October 31. The Fed rate cuts will likely help restaurant stocks as they would to the broader market. The low cost of borrowing will boost consumer spending and ease the burden on restaurant owners, allowing them to go ahead with their expansion plans.
In September this year, the Federal Reserve announced a 50-basis point rate cut – the first since March 2020 – to lower the range of interest rates from 4.75% to 5%. Details emerging from the minutes of the September meeting disclosed a ‘substantial majority’ of central bankers backing the cut, which has raised optimism among investors for further cuts ahead in the November meeting.
Another encouraging recent trend has been the downturn in the country’s inflation, which dropped to 2.4% in September and is inching toward the Federal Reserve’s goal of a two percent annual rate.
The iconic yellow and red roof of a franchise restaurant in the bustling streets of a city.
Our Methodology
We used Finviz’s restaurant industry screener to sample stocks for this article and then identified the companies that dealt with fast food. Among them, we picked the top 11 companies with the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 912 hedge funds for the second quarter of 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Yum China Holdings, Inc. (NYSE:YUMC)
Number of Hedge Fund Holders: 24
Yum China Holdings, Inc. (NYSE:YUMC) is a Fortune 500 restaurant company, headquartered in Shanghai, China, which operates and manages several well-known brands, such as KFC, Pizza Hut, and Taco Bell.
The company posted strong results in Q2 2024, setting numerous records, including a quarterly revenue of $2.68 billion, operating profit of $266 million, and diluted EPS of 55 cents. Total transactions grew 13%, with same-store transactions expanding 4%, driven by healthy traffic. Yum China Holdings, Inc. (NYSE:YUMC) attributed the success this quarter to its ability to attract new and existing customers through a broadened price range that offers quality offerings at affordable rates. The company also ended the quarter in solid liquidity, with $3.1 billion in net cash.
In May, Yum China Holdings, Inc. (NYSE:YUMC) launched the first Pizza Hut WOW store in Guangzhou, a cheaper version of the chain, with the menu priced significantly less than traditional Pizza Hut restaurants in the country. The concept behind this is to cater to price-conscious diners in China, as the economy struggles. The company has converted around 100 Pizza Hut restaurants into WOW stores and intends to achieve 200 outlets by the end of the year.
This was the most profitable quarter for Pizza Hut, because of the success of WOW stores and the company’s efforts in enhancing operational efficiency which it achieved by simplifying menu and kitchen operations, which reduced production preparation time. Yum China Holdings, Inc. (NYSE:YUMC) has also added innovative offerings to its menu, like the Pizzaburger, which proved a great success and outsold the Hawaiian Pizza, one of their synergies.
Another business segment that contributed to growth during the quarter was K-Coffee, a coffee brand operating adjacent to KFC restaurants in China. Its sales have exceeded RMB 1 billion (approximately $140 million) during the first half of the year, registering a 26% increase from 2023. The company has sold over 120 million cups between January and June, up 36% year-over-year. Yum China Holdings, Inc. (NYSE:YUMC) had rolled out around 200 K-Coffee stores until the end of June, with plans to open between 500-600 by the end of the year.
Yum China Holdings, Inc. is one of the best fast food stocks to invest in right now. Wall Street analysts have a consensus Strong Buy rating on the stock, with a median share price upside potential of 14%.
Overall, YUMC ranks 6th among the 11 best fast food stocks to invest in right now. While we acknowledge the potential of fast food companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than YUMC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article is originally published at Insider Monkey.