Mr. Market is betting for China and against America these days. For example, China’s largest fast-food operator Yum China (NYSE: YUMC) rose from $49.13 on 2 January 2020 to $52.55 on 17 July 2020.
Yum China operates KFC, Pizza Hut, Taco, and several other fast-food brands in the People’s Republic. In contrast, Yum! Brands (NYSE: YUM) share price fell from $102.17 on 2 January 2020 to $88.29 on 13 July 2020 to $90.57 on 17 July 2020.
Yum! Brands operates Kentucky Fried Chicken (KFC), Wing Street, Taco bell and other brands outside China. Thus, Mr. Market is paying a little more for YUMC and less for YUM.
The Safety Investors’ Case for Yum China
The safety investors’ case for Yum China is simple. China has the coronavirus under control and the United States; Yum! Brands’ core market, does not.
The United States led the world in coronavirus cases (3.751 million) and deaths (141,801) on 17 July 2020, Worldometers estimates. In contrast, China reported 83,622 coronavirus cases and 4,634 deaths on the same day. Dramatically, the United States reported 56,226 fresh coronavirus cases on 17 July 2020, while China reported 10 new COVID-19 cases.
Therefore, the Yum restaurants in the United States could close for the foreseeable future. However, the Yum China restaurants could be open and making money.
Under these circumstances, Yum China is a safe investment for the coronavirus age.
The Value Investors Case for Yum China
The value investors’ case for Yum China is easy. Yum China operates over 9,200 over restaurants in in over 1,400 Chinese cities and towns.
Dramatically there are over 1.439 billion people in China and all of them eat. Additionally, China is the world’s second largest economy with a gross domestic product (GDP) of $14.14 trillion in May 2020. The International Monetary Fund predicts China’s GDP is growing at a rate of 5.8%.
There are hundreds of millions of people in China who can afford fast food. The Chinese middle class comprises 400 million people and 140 million households, China Briefing estimates. Thus around one third of China’s population or 400 million people have enough disposable income to buy fast food.
Fast food is one of the first modern luxuries that people in developing nations embrace. For example, fast-food first became popular in the United States during the massive post-World War Two expansion of the middle class in the 1950s and 1960s. Notably, they founded KFC, Taco Bell, and Pizza Hut during the 1950s and 1960s.
Hence, the ingredients for a fast food boom are in place in China. In contrast, America could face a fast food collapse. To explain, I think coronavirus could drive some fast food operators out of business.
Is Yum China Making Money?
Yum China Holdings Inc. (NYE: YUMC) made money despite coronavirus. For instance, Yum China made a $371 million gross profit on revenues of $1.754 billion in the quarter ending on 31 March 2020.
Additionally, Yum China reported a $62 million common net income for the same quarter. Plus Yum China made some cash in the form of a $60 million operating cash flow during that quarter.
Yum China finished last quarter with an ending cash flow of $1.057 billion. Thus, Yum China generated cash during a pandemic.
At the end of the quarter Yum China retained some value in the form of $1.538 billion in cash and short-term investments and total assets of $6.577 billion. However, Yum lost value it reported $1.657 billion in cash and short-term investments and total assets of $6.950 billion on 31 December 2019.
Yum China is Making Less Money
Yum China made less money because of coronavirus. For instance, YUMC’s quarterly revenues fell from $2.029 billion on 31 December 2019 to $1.754 billion three months later.
Yum China’s quarterly gross profit fell from $441 million to $371 million in the same period. In contrast, Yum China’s quarterly operating income rose from $94 million to $97 million on the same dates. Conversely, Yum China’s quarterly common net income fell from $90 million at the end of 2019 to $62 million in March 2020.
Oddly, Yum China had more cash in March 2020, even though its operations were generating less cash. To elaborate, YUMC’s quarterly operating cash flow fell from $140 million in December 2019 to $60 million in March 2020. Yet Yum China’s ending cash flow grew from -$309 million to $1.057 billion in the same period.
Yum China shows Fast Food will shrink
I think there is one figure in Yum China’s finances fast-food investors need to pay attention to.
Stockrow estimates Yum China’s revenue growth shrank by -23.87% in the quarter ending on 31 March 2020. In contrast, Yum China’s revenue growth grew by 6.01% in the last quarter of 2019.
I think Yum China shows fast-food companies shrink during pandemics. Conversely, Yum! Brands’ (NYSE: YUM) revenues grew by 0.72% in the first three months of 2020 and 8.73% in the last three months of 2019.
I predict Yum Brands’ revenue growth will shrink in the next quarter. In addition, I predict Yum Brands’ revenues, gross profit, operating income, and net income will shrink next quarter. Those numbers will shrink because coronavirus wiped out Yum! Brands’ sales.
Additionally, I think Yum Brands’ US sales will not recover soon because of coronavirus. For instance, California Governor Gavin Newsom (D-San Francisco) closed all indoor restaurant service in the Golden State on 13 July 2020 to control the spread of COVID-19, Deadline reports.
Frighteningly, Newsom gave no date for restaurant reopening. Hence, Yum Brands and other fast outlets will be takeout only for the foreseeable. That will help take out focused chains such as KFC and Pizza Hut. However, it will hurt chains such as Taco Bell that depend on indoor dining.
Is Yum China a Safe Investment?
In the final analysis I predict a terrible year for American fast food and a decent year for Chines fast food. Given that reality, I think investors need to investigate Yum China (NYSE: YUMC).
I think Yum China is worth investigating because it paid a 12₵ quarterly dividend on 3 March 2020. Over all, Dividend.com estimates Yum China offered a 48₵ yearly dividend and a 0.93% dividend yield on 13 July 2020.
If you are looking for a dividend stock with little exposure to America’s coronavirus crisis, investigate Yum China. I think Yum China could help vaccinate your portfolio against coronavirus.
Originally published at https://marketmadhouse.com on July 17, 2020.
