Sector Snap: Restaurants

A KeyBanc Capital Markets analyst said Tuesday restaurants that are able to raise prices and still offer consumers value will likely be the most successful as commodity costs rise.

Analyst Lynne Collier said in a note to investors that commodity costs are "here for the foreseeable future" given increased production of the alternative fuel ethanol _ which is made with corn _ demand from emerging markets and higher freight costs.

Heavy Midwest rains that soaked and damaged corn crops has only made the situation worse, she said. Corn neared $8 a bushel last week due to concerns that the rains and the resultant flooding would shrink supply of the grain.

When prices for commodities like corn rise, restaurants often bear some of the burden since higher prices of food ingredients means higher costs and a hit to profits.

Collier said prices for beef, chicken and pork are expected to rise.

Some restaurants have increased menu prices to offset the costs. Collier said the restaurants that are most likely to perform well in the challenging cost environment are those that have been the least aggressive in raising prices since they have more room to maneuver and hike their prices in the future.

She added that companies with "superior price/value equations" will also likely be able to weather the costs.

She noted BJ's Restaurants Inc., Darden Restaurants Inc. _ which operates the Red Lobster and Olive Garden chains _ Buffalo Wild Wings Inc. and Red Robin Gourmet Burgers Inc. are the best bets.

BJ's shares rose 10 cents to $10.81 in morning trading and Darden shares added $1.05, or 3.2 percent, to $31.69. Buffalo Wild Wings shares climbed 77 cents, or 2.9 percent, to $27.30 and Red Robin shares jumped $1.10, or 3.7 percent, to $31.13.

Collier said restaurants most exposed to beef costs and those that have been the most aggressive in recent years would fare the worst. She named Sonic Corp., P.F. Chang's Bistro Inc., Ruby Tuesday Inc. and Benihana Inc.

Sonic shares fell rose 18 cents to $16.47 and P.F. Chang's shares added 68 cents, or 3 percent, to $23.37. Ruby Tuesday shares dipped 24 cents, or 3.9 percent, to $5.94 and Benihana shares fell 15 cents to $6.85.