Investors with an interest in Retail - Restaurants stocks have likely encountered both Yum China Holdings (YUMC) and Dutch Bros (BROS). But which of these two stocks is more attractive to value investors? We'll need to take a closer look to find out.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The proven Zacks Rank puts an emphasis on earnings estimates and estimate revisions, while our Style Scores work to identify stocks with specific traits.
Currently, both Yum China Holdings and Dutch Bros are holding a Zacks Rank of #2 (Buy). This means that both companies have witnessed positive earnings estimate revisions, so investors should feel comfortable knowing that both of these stocks have an improving earnings outlook. But this is only part of the picture for value investors.
Value investors also tend to look at a number of traditional, tried-and-true figures to help them find stocks that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
YUMC currently has a forward P/E ratio of 14.94, while BROS has a forward P/E of 71.38. We also note that YUMC has a PEG ratio of 1.23. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. BROS currently has a PEG ratio of 1.93.
Another notable valuation metric for YUMC is its P/B ratio of 2.52. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, BROS has a P/B of 11.9.
These are just a few of the metrics contributing to YUMC's Value grade of B and BROS's Value grade of F.
Both YUMC and BROS are impressive stocks with solid earnings outlooks, but based on these valuation figures, we feel that YUMC is the superior value option right now.
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This article originally published on Zacks Investment Research (zacks.com).