BofA Points To Yum China's Earnings Downside Risk In Downgrade

Shares of Yum China Holdings Inc YUMC are trading near 52-week lows, and its decline since January doesn't fully factor in future downside risk, according to Bank of America Merrill Lynch. 

The Analyst

BofA's Chen Luo downgraded Yum China from Neutral to Underperform with a price target lowered from $44.30 to $34.

The Thesis

Yum China's stock has lost around 8 percent since the start of 2018, but three headwinds ahead suggest the stock holds incremental downside, Luo said in a Friday note.

Trends in KFC likely peaked, as seen in the lack of margin leverage in the first quarter despite 5-percent same-store-sales growth. The brand could potentially be negatively impacted by a rise in anti-U.S. nationalism, the analyst said. 

The extent of Pizza Hut's struggles to date may be overlooked for multiple reasons, Luo said:

• Extreme competition in the pizza space.
• An aging of the brand.
• A complicated menu.
• Service intensity.
• Oversized stores.
• Integration issues between the casual dining and home delivery options.

Although not specific to Yum China, it would be reasonable to assume a "certain level of slowdown" for the domestic restaurant industry if China's economy continues to show some signs of weakening, the analyst said. 

Price Action

Yum China shares were trading down 5.83 percent to $33.90 at the time of publication Friday afternoon. 

Related Links:

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Buy The Weakness in Yum China Shares, Says Morgan Stanley Analyst

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