Ahead of Earnings This Sector Makes Me Nervous, Says Fast Pro

Catherine Holahan
Tuesday, 25 Jan 2011 | 11:38 AM ET

Commodity prices were plummeting Tuesday morning on fears that Europe and Asia would soon do more to clamp down on food inflation. But the price action didn’t assuage Fast Money Trader Josh Brown’s concern for the restaurant industry.

Brown, a financial advisor with Fusion Analytics, cautioned against investing in the food services sector ahead of a slew of scheduled earnings reports from publicly traded chain restaurants. He argued that the run-up in wheat, corn, soy and cattle prices over the past year would squeeze restaurant margins in the upcoming quarter, if they haven’t already.

“Restaurant stocks are making me nervous into this earnings season,” said Brown. “They are going to start to complain about raw costs – energy and food costs – any minute this earnings season.”

Though commodities have cooled in recent weeks, most commodity futures are still up more than 20% in the past year. Corn is up more than 75% in the past 52 weeks. Wheat and coffee are not far behind. The price of cattle futures is up nearly 30% in the past year.

Part of Brown’s concern stemmed from McDonald’s earnings. During the fast food chain’s earnings call Monday morning, McDonald’s Chief Financial Officer Pete Bensen said the company will raise prices this year to offset commodity price hikes. McDonald’s executives predict that commodity costs will rise this year between 2% and 2.5% in the U.S. and between 3.5% to 4% in Europe.

McDonald’s may be able to pass along price increases, but Brown fears other restaurants will not be as fortunate.
Fueling Brown’s fears, Chili’s owner Brinker International said Tuesday morning that same-store sales fell 3.7% in the quarter from the prior year. Total revenues at Chili’s fell 7.4% to $538.3 million. However, Chili’s losses were offset by higher than expected profits at its Maggiano’s Little Italy Restaurants.

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