Finance

Dissecting the Numbers for Yum China Holdings, Inc. (YUMC) and PennyMac Mortgage Investment Trust (PMT)

Yum China Holdings, Inc. (NYSE:YUMC) shares are up more than 0.62% this year and recently decreased -1.90% or -$0.78 to settle at $40.27. PennyMac Mortgage Investment Trust (NYSE:PMT), on the other hand, is up 7.09% year to date as of 04/13/2018. It currently trades at $17.21 and has returned -5.13% during the past week.

Yum China Holdings, Inc. (NYSE:YUMC) and PennyMac Mortgage Investment Trust (NYSE:PMT) are the two most active stocks in the Restaurants industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect YUMC to grow earnings at a 12.00% annual rate over the next 5 years. Comparatively, PMT is expected to grow at a 5.00% annual rate. All else equal, YUMC’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 57.28% for PennyMac Mortgage Investment Trust (PMT). YUMC’s ROI is 20.20% while PMT has a ROI of 2.10%. The interpretation is that YUMC’s business generates a higher return on investment than PMT’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. YUMC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.64. Comparatively, PMT’s free cash flow per share was -. On a percent-of-sales basis, YUMC’s free cash flow was -3.46% while PMT converted 0% of its revenues into cash flow. This means that, for a given level of sales, PMT is able to generate more free cash flow for investors.

Liquidity and Financial Risk

YUMC’s debt-to-equity ratio is 0.00 versus a D/E of 3.15 for PMT. PMT is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

YUMC trades at a forward P/E of 21.58, a P/B of 5.57, and a P/S of 2.22, compared to a forward P/E of 9.95, a P/B of 0.89, and a P/S of 2.27 for PMT. YUMC is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. YUMC is currently priced at a -18.91% to its one-year price target of 49.66. Comparatively, PMT is 2.99% relative to its price target of 16.71. This suggests that YUMC is the better investment over the next year.

Insider Activity and Investor Sentiment

Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. YUMC has a short ratio of 1.39 compared to a short interest of 3.28 for PMT. This implies that the market is currently less bearish on the outlook for YUMC.

Summary

Yum China Holdings, Inc. (NYSE:YUMC) beats PennyMac Mortgage Investment Trust (NYSE:PMT) on a total of 9 of the 14 factors compared between the two stocks. YUMC is growing fastly, generates a higher return on investment, higher liquidity and has lower financial risk. YUMC is more undervalued relative to its price target. Finally, YUMC has better sentiment signals based on short interest.

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