Two analysts sounded a warning note about restaurants and the run-up they're facing in costs for ingredients.
In a note to clients Wednesday, Jefferies & Co.'s Andy Barish and Alexander Slagle said it's likely that the restaurant industry has overestimated its earnings projections for 2011 and 2012, and underestimated the coming inflation in costs for commodities like corn and soybeans.
They cited a recent U.S. Department of Agriculture report, which they said predicts that U.S. corn production will be more than 20 percent lower than previously predicted. Heavy rain has cut down on plantings. Also, U.S. farmers are exporting more because the weak dollar makes their crops more desirable for other countries, and because demand is growing in emerging-market countries as they gain higher standards of living.
Higher corn prices make it more expensive to feed cattle. That could drive meat producers to "liquidate herds early," as Barish and Slagle put it, which would make supplies even tighter in the future.
The analysts said they believe restaurants will need to raise menu prices by 2 to 3 percent, and gain more visitors, in order to hit earnings estimates. The industry has forecast 15 percent growth in per-share earnings in 2011, and 19 percent growth next year, according to the analysts.
The S&P 500 restaurant index is up about 19 percent compared with a year ago, though it has fallen about 3 percent from peaks four weeks ago.
Restaurants face a delicate balancing act as they deal with rising prices for raw ingredients. They want to pass along the extra costs to customers. But they don't want to raise prices too much or they'll drive away those customers.
In the past year, the cost of corn has more than doubled from about $3.56 per bushel to $7.60 per bushel.
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