Ahead of the Bell: Yum Brands decline

NEW YORK (AP) -- Yum Brands shares tumbled 6 percent before Tuesday's opening bell after the parent company of KFC, Pizza Hut and Taco Bell warned that it expects its 2013 profit to decline as it continues to reel from a controversy over its chicken suppliers in China.

The Louisville, Ky.-based company gave the grim forecast after its profit in the fourth quarter fell 5 percent, with a key sales figure in China dropping. For January and February, the company expects sales at restaurants open at least a year in China to plummet 25 percent.

Yum has been hit with a slew of negative media attention in the weeks since an investigation aired on Chinese national TV. The TV station had reported that Yum's suppliers were ignoring regulations and giving chickens unapproved levels of antibiotics.

A government investigation into the issue ended on Jan. 25, and Yum has agreed to adopt measures to strengthen its oversight of suppliers. But the company says it will take time to recover.

Even though Yum has far more locations in the U.S., its restaurants in China are more profitable because the cost of doing business there is lower and there's much more room for growth. Yum is the biggest Western fast-food chain in the country with KFC accounting for most of its 5,300 locations.

Jefferies analyst Andy Barish backed his "Hold" rating, but cut his price target for the stock by $14 to $54, saying that the scandal in China will likely affect the company's profits through 2013.

"The company is working to rebuild brand in China but has no visibility on when sales will stabilize, and we are concerned given traffic was down even before the chicken scare," Barish wrote in a note to investors.

But Janney Capital Markets analyst Mark Kalinowski backed his "Buy" rating, saying that Yum has "sizable opportunities" to expand in emerging markets both in and outside of China over the long run. But he cut his fair value estimate by $7 to $68 to take into account lower-than-previously-expected profit estimates for the next two years.

"Although the shares may trade choppily in the near term, this is the type of opportunity some long-term investors clamor for," Kalinowski wrote in his note. "We're sticking with our 'Buy' rating to reflect our view that eventually, in hindsight, this day should end up being viewed as a buying opportunity for those with a longer-term view."

Yum shares fell $3.94, or 6 percent, to $60 in premarket trading.