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The Zacks Analyst Blog Highlights: Tyson Foods, Domino's Pizza, Papa John's International, Yum! Brands and Dunkin' Brands Group

Zacks Equity Research

For Immediate Release
Chicago, IL – March 25, 2014 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Tyson Foods, Inc. (TSN-Free Report), Domino's Pizza, Inc. (DPZ-Free Report), Papa John's International Inc. (PZZA-Free Report), Yum! Brands, Inc. (YUM-Free Report) and Dunkin' Brands Group, Inc. (DNKN-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Monday’s Analyst Blog:

Will Food Price Inflation Hurt Restaurateurs?

The U.S. Department of Agriculture (:USDA) has indicated that the economy will witness a rise in food prices in 2014. After staying at a modest 1.4% in 2013, the consumer price index (all food) is most likely to witness a 2.5-3.5% jump this year. This should take the food price inflation back “to a range closer to the historical norm.”

Thus, it is for investors to wonder what happens with the restaurateurs or food sellers and how well can they tackle food price inflation.

What food chains need to focus on is strategies that will help them mitigate the increased cost, if at all they are impacted. Implementing the right pricing strategy, increasing global presence and focusing on supply chain revenues may be some of the escape routes.

Meat Prices to Go Up

The highest price inflation for foods consumed at home is expected to be seen in beef, veal and poultry prices. The jump could be as high as 3-4% year over year. The report noted: “Beef prices are on the rise due to a lower than average supply of cattle resulting from the lingering effects of the 2012 drought.”

This, however, is not expected to immediately dampen the nation’s popular meat products seller Tyson Foods, Inc. (TSN-Free Report). Earnings estimates for this Zacks Rank #1 (Strong Buy) stock have been moving north for both the current quarter and year, and it commands a current year growth estimate of 32.2%. That compares favorably with industry growth estimate of 18.6%. Also, Tyson was recently picked as one of “America's Most Admired Companies” by Fortune magazine.

Does Passing the Buck Work?

Given the highly cost-sensitive nature of the industry, it often becomes difficult for the restaurateurs to immediately pass on the burden to customers. Here comes the worry part for investors. Higher prices may result in higher revenues, but that may come along with a drop in profit margins.

Retail prices may not always follow the uptrend of commodity prices. Domino's Pizza, Inc.’s (DPZ-Free Report) vice president of communications Tim McIntyre believes the “industry is far too competitive for that.” What Domino’s can do most is pass higher commodity costs to restaurant customers, with a fixed dollar margin. It may not result in higher profits though.

Cheese is about 40% of Papa John's International Inc.’s (PZZA-Free Report) food cost. Bloomberg data notes that since December the prices of mozzarella cheese and cheddar cheese jumped 16% and 25%, respectively. However, we have not seen any retail price hike of late.

What happens in these cases is that a drop in other ingredient costs offset the hike. A record harvest last year had substantially brought down dough prices. Also, franchises may cut back on promotion activities. They may instead try and boost the sales of non-cheese menu items. Thus, the restaurateurs need strategies that will hedge price changes.

Supply Chain Revenues

Domino's Pizza may be known for its pizzas, but its primary business of selling pizza ingredients like cheese, toppings and dough to company-owned stores and franchises help it earn higher revenues. The supply-chain business ranges from ingredients to selling restaurant equipment. This business contributed 56% to sales while retail contributed only 19%.

Also, Papa John's International self-termed “domestic commissary” contributed 40% of sales. This is the ingredients business of Papa John’s.

Global Presence Looks Bright

With a fast growing and prosperous middle class, emerging markets like China and India have emerged as the destinations of choice for many restaurateurs.

Domino's Pizza’s comps further affirm the necessity to grow globally. Its fourth quarter domestic stores comps rose 3.7%, well short of 5.4% growth in third quarter and the year-ago level of 4.7%. However, international stores recorded 7% growth (foreign currency translation excluded). The international comps were also better than the third-quarter comps of 5% and the year-ago level of 5.2%. Domino's has a Zacks Rank #3 (Hold) now.

Here, investors may focus on Yum! Brands, Inc. (YUM-Free Report). The owner of KFC, Yum! Brands is claimed to be the fastest growing quick service international brand. Currently carrying a Zacks Rank #2 (Buy), this industry behemoth is also seeing decent upward earnings estimate revisions. The current year growth estimate of 22.2% outshines the industry estimate of 8.8%.

Baskin-Robbins owner Dunkin' Brands Group, Inc. (DNKN-Free Report) is another solid choice here. It too carries a Zacks Rank #2 (Buy) and has seen solid upward estimate revision. Its two brands, Dunkin Donuts and Baskin-Robbins, have gained decent popularity in Asia and the Middle East. These regions respectively contributed 73.8% and 13.6% of 2012 international franchise sales. Baskin-Robbins in particular generated 87% of international revenues.

Strategy of Pricing and Menu

The price and menu options, often an outcome of right strategy, may influence a consumer on which restaurant should he or she visits. What consumers usually look for is the perfect blend of price and product they receive.

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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