We recently compiled a list of the 10 Undervalued Cyclical Stocks to Buy According to Analysts. In this article, we are going to take a look at where Yum China Holdings, Inc. (NYSE:YUMC) stands against the other undervalued cyclical stocks.
Economic growth in the U.S. surpassed forecasts in the second quarter, driven by robust consumer demand and increased government expenditure. The real gross domestic product, a measure of all goods and services produced, grew at an annualized rate of 2.8%, beating consensus estimates of 1.4%. It also significantly improved from the 1.6% GDP growth recorded in the first quarter.
Nevertheless, the economy has slowed in the year’s second half due to disappointing economic data. Private sector payrolls grew at the weakest pace in more than 3½ years in August, providing yet another sign of a deteriorating labor market, according to ADP. The weakness is a concern, especially for cyclical companies that experience the largest fluctuations in sales and profits as the economy strengthens or weakens.
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Since August was the weakest month for job growth since 2011, there are growing concerns that the U.S. economy is cooling off. Early indication is that hiring has slowed from the blistering pace following the COVID pandemic. Such weakness could spell more doom to cyclical companies in the materials, restaurant, and consumer food segments as prospects depend on consumers’ purchasing power.
Jamie Dimon, the Chief Executive Officer JPMorgan, is not ruling out stagflation even as the Fed cuts interest rates to try and support the economy. Dimon is concerned that a wave of inflationary pressures is approaching, including greater deficits and more spending on infrastructure, which will keep adding strain to an economy that is still recovering from the effects of rising interest rates. In August, he mentioned that the chances of a “soft landing” were estimated to be between 35% and 40%, suggesting that a recession is the more probable scenario.
Weak employment figures for July raised concerns that the U.S. economy might be on the verge of a downturn, sending the stock market lower. Likewise, August employment numbers sent the U.S. equity market a lower kick, starting the worst months for stocks.
While Fundstrat’s equity strategist, Tom Lee, expects the stock market to run into some turbulence on valuation levels getting out of hand, he expects pullbacks to present some of the best buying opportunities. Lee expects up to 10% pullbacks as investors navigate one of the most important months for stocks.
While the analyst believes investors should be cautious over the next eight weeks, it might be one of the best times to pay attention to undervalued cyclical stocks to buy. Cyclical stocks are poised to receive a significant boost on the U.S. Federal Reserve cutting interest rates in a bid to prevent the economy from plunging into recession.
While Lee believes the uncertainty over the U.S. election could add to the layer of uncertainty, any up to 10% pullback would provide an ideal entry-level, especially for value cyclical stocks.
In an interview with CNBC, Carl Weinberg, Chief Economist at High-Frequency Economics, reiterated it would take much more than the current weakness in the economy for the Fed to trigger a panicked 50 basis point rate cut. Nevertheless, any panic that comes into play with the Fed cutting by more than 25 basis points would present an opportunity to continue holding the best cyclical stocks that remain resilient amid such uncertainties.
Our Methodology
For this article, we scoured through Yahoo Finance stock screener to find stocks in all the cyclical sectors with price-earning ratios of under 15. Next, we shortlisted our list to 10 stocks with Buy or better ratings with the highest average analyst price targets on September 11. The analyst ratings were taken from TipRanks, and the stocks are listed in ascending order based on their average price target upside potential.
At Insider Monkey, we are obsessed with 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).
The iconic yellow and red roof of a franchise restaurant in the bustling streets of a city.
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.”
Overall YUMC ranks 5th on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of YUMC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than YUMC, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
