Sector Snap: Restaurants

A Goldman Sachs analyst warned restaurants may see lower profits in 2009 due pressure on consumers from continued high gas and food prices and more rising commodity costs.

Analyst Steven T. Kron wrote Sunday in a note to investors that although sales trends may turn positive in the near-term due to the influx of economic stimulus checks in mailboxes and bank accounts, "we believe sustainability will be questioned given unabating, and importantly, incremental consumer pressures" such as far higher gas and food prices.

"We believe this will keep a cloud over the industry and valuations broadly," he said.

Kron noted that commodity costs could cut into 2009 profits since contracts with favorable pricing in place for 2008 will expire and need to be renegotiated, likely at higher prices. Grains, dairy and meat have already become far more expensive and could become even costlier given the recent rise in corn prices to near $8 a bushel. Corn is a key ingredient in animal feed, so protein and animal byproducts like milk and cheese can be affected by increases in the corn price.

Kron said investors should focus on single companies that offer sales momentum despite the challenges in the overall economic environment.

He cited Burger King Corp. and McDonald's Corp. as two top picks.

Burger King shares fell 32 cents to $28.13 in morning trading while McDonald's shares rose 24 cents to $57.64.

Darden Restaurants Inc., which operates the Olive Garden and Red Lobster chains, may be a good buy as well, he said.

Darden shares fell 25 cents to $31.39.

Elsewhere in the sector, shares of Cheesecake Factory Inc. fell 27 cents to $16.71 and shares of Brinker International Inc., which operates the Chili's Grill and Bar chain and others, dipped 45 cents, or 2.4 percent, to $18.30.

Shares of Wendy's International Inc. rose 35 cents to $30.40.