FRS has less exposure than they used to with Golden Coral less beef dependent than the more "hamburger" related Big Boys, but beef prices might actually come down and I don't thik this is a big problem - read on (I am looking at Brinker)
In a note to clients, David Palmer of UBS said the bans on imports of U.S. beef could send prices down 20 percent or more. So far, Japan, Korea and Russia have announced bans.
"If the stocks open as weak as we expect, then we believe this could provide an even more compelling entry point for McDonald's," Palmer said.
"We would also view this positively for Wendy's (which already has tremendous near-term momentum. In addition, we believe the likely beef cost decrease could prove particularly propitious for Brinker, which has significant exposure to rising beef costs in 2004."
McDonald's (MCD: news, chart, profile) shares were down 5.3 percent at $23.95 in pre-market trade.
Bear Stearns analyst Joseph Buckley said the biggest risk is that consumers would change their eating habits. However, if the case remains an isolated one, as was the case in Canada, it is unlikely to alter eating habits.
"We are concerned but not panicked by this chain of events," said Buckley. "Restaurant stocks of beef-focused companies traded lower in aftermarket trading yesterday. The initial reaction is understandably negative but the same reaction represented a buying opportunity last May when Canada discovered what has thus far been a single case of mad cow disease."
Lehman Brothers' Mitchell Speiser said any selling of beef-related stocks in today's light pre-Christmas trade represents a "huge opportunity".
Speiser noted McDonald's and Wendy's (WEN: news, chart, profile) have placed increased emphasis on hamburger alternatives such as salads, chicken and dessert/snacks.
U.S. beef sales as a percent of company sales now represent only about 15 percent of worldwide sales at both chains, he said. "Note that McDonald's has indicated no connection to the farms or the beef packers associated with the incident.
"Wendy's has not issued a statement as of yet," he said.
Wendy's shares were not yet quoted in pre-market trade.
Rare Hospitality (RARE: news, chart, profile), which operates the Longhorn steakhouses, was down 12 percent at $22.40 in light volume.
Agreed. FRS will benefit from lower beef prices and this will not alter consumer behavior much and of course, FRS (like most chains) has plenty of non-beef items on the menu at Golden C and at flagship Big Boys.
Actually, I think a lot of investors used this as an excuse to profit take on restaurant stocks that have had a nice run. Right now, I think FRS is pretty much fairly valued with good potential to generate 5 to 9% capital gain appreciation plus the dividend.
The key is Golden Corral. As the firm has more experience with the concept and opening costs as a % of sales drop and as advertising economies of scale and administriative economies of scale kick in, I expect some serious profit acceleration at this chain. it has been a big drag so far - lots of money poured in with no return.
Also, the pension situation should be looking up with increase in equity values.