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'Worst Case' Possible for Yum in China: Analyst

Tuesday, 5 Feb 2013 | 11:55 AM ET
YUM Slumps on Weak China Sales
David Palmer, UBS analyst, discusses the sharp drop in YUM shares, and explains why he has a "neutral" rating and $63 price target on the stock.

Yum Brands, the parent of restaurant chains Taco Bell, KFC, and Pizza Hut, was off to a rocky start in trading Tuesday as the company reported surprise weakness in China, where its business is expected to shrink this year.

"This skews to the worst case for the company," said David Palmer, managing director and senior food & restaurant analyst at UBS, who covers the company. China represents almost half of the business, in profit terms, for the company, he said in an interview on CNBC's "Squawk on the Street."

UBS cut its per share price target for Yum on Tuesday from $69 to $63, with a "base case" estimate of -8 percent decline for same store sales in China with a -20 percent decline in profit in the country. The "worst case" from UBS shows a -25 percent profit decline with an implied stock price of $50.

"If you see some stabilizing results from McDonald's and KFC in China, you can start to plan out when the recovery will happen," he said about the market for fast food. Right now, he thinks the market is expecting a "sharp rebound" in 2014.

"If they can restore trust, they can come back with a very strong recovery," he said, noting that the company is planning a public relations campaign after the Chinese New Year.

Palmer sees as much as 30 percent to 50 percent in profit declines in the first half of the year for Yum. "The Chinese press really ran with something, clearly the consumer reaction was severe," he said.

YUM Addresses China Crisis
Yum! Brands CEO David Novak says the company is reworking quality assurance issues in China, reports CNBC's Jane Wells.

Yum is forecasting a "mid-single-digit" percentage decline in earnings per share for 2013, after a drop in same-store sales of 37 percent in January. In the fourth quarter, Yum reported a 6 percent drop in sales at established restaurants in China due to "adverse publicity" regarding chemical residue found in some of its chicken supply.

Fourth-quarter net income at Yum fell to $337 million ($0.72 per share), from $356 million ($0.75 per share) from a year earlier.

Excluding special items, Yum had a profit of 83 cents per share, beating analysts' average estimate of 82 cents, according to data from Thomson Reuters. Total revenue rose to $4.15 billion from $4.11 billion.

— By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from Squawk on the Street @ToscanoPaul

Reuters contributed to this report.

Additional News: Yum Warns on 2013 as China Scare Hurts KFC

Additional Views: Is It Lights Out for Yum in China?

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