24 February 2009
The Monthly Mouthful
From the Field to the Table
Christina McGlone
Research Analyst
(1) 203 863 2283
christina.mcglone@db.com
Jason West, CFA
Research Analyst
(1) 617 217 6256
jason.west@db.com
Highlights
In this monthly piece, our agribusiness/protein and restaurant teams take a
collaborative approach to study the issues surrounding the supply of commodities
and demand stemming from the restaurant sector.
Deutsche Bank Securities Inc.
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LOCATED IN APPENDIX 1.
Market Update
Top picks
Tyson Foods (TSN.N),USD9.15 Buy
Bunge (BG.N),USD49.91 Buy
Burger King (BKC.N),USD19.50 Buy
Companies featured
Archer-Daniels-Midland (ADM.N),USD28.52 Hold
Bunge (BG.N),USD49.91 Buy
Corn Products Internation’l (CPO.N),USD24.25Hold
Hormel Foods (HRL.N),USD30.61 Hold
Sanderson Farms (SAFM.OQ),USD33.48 Hold
Smithfield Foods (SFD.N),USD10.65 Hold
Tyson Foods (TSN.N),USD9.15 Buy
Burger King (BKC.N),USD19.50 Buy
McDonald's (MCD.N),USD57.28 Hold
YUM Brands, Inc. (YUM.N),USD28.90 Hold
Texas Roadhouse (TXRH.OQ),USD7.94 Hold
Panera Bread Co (PNRA.OQ),USD45.93 Hold
Chipotle Mexican Grill, Inc (CMG.N),USD48.11Hold
Ruth's Chris (RUTH.OQ),USD1.17 Hold
Related recent research Date
Protein Processing Basics
Christina McGlone 20 Oct 2008
The Monthly Mouthful
C. McGlone/J. West 12 Jan 2009
Global Markets Research Company
Menu pricing at an inflection point
We see lower traffic and a sharper promotional environment as key downside
risks for the restaurant sector in ‘09. Of note, menu pricing likely peaked in 4Q08.
We believe menu price inflation has helped mask weaker underlying traffic trends
for many chains. As pricing rolls off, comps could look materially worse than the
already weak numbers we’re seeing today. E.g., industry-wide same store sales
fell ~3.3% in 4Q08, while “food away from home” CPI rose 4.9%.
Protein: demand takes precedence over supply cuts
Despite a drop in production in all four major proteins, the price response has
been driven by demand. We continue to view the chicken industry as most
attractive for four reasons: (1) it is the least expensive protein and featuring has
picked up, (2) if the drop in demand exceeds the drop in supply, production can be
re-adjusted to result in even lower production over an approximate 10-week timeframe,
(3) chicken prices have responded to production cuts, and (4) a structural
change is in the offing with Pilgrim’s slated to announce its restructuring program
shortly.
Recommendations
Burger King (BKC: Buy) remains our best idea in a very challenging restaurant
sector given several internal sales drivers (reimaging, extended hrs., breakfast,
new broilers, unit growth) and an improving margin story, owing to declining
ground beef costs and easing expense compares. Valuation also compelling at
12.9x NTM EPS and 7.4x EBITDA, below McDonald’s (14.4x, 8.9x) and YUM!
Brands (13.5x, 7.8x). Our top recommendation in the protein space is Tyson owing
to our positive view on chicken. We view F1Q09 (end Dec) as the trough earnings
period and expect results to improve as the FY progresses. Moreover, we view its
recent financing effort as positive as it avoids the $30 million in cash payments
associated with the December 17, 2008 credit amendment + eases covenant
restrictions, which do not go into effect unless the credit facility is over 85%
drawn. We continue to be positive on Bunge long term, and are encouraged by
the recent stabilization in phosphate prices. However, we are cautiously
monitoring U.S. planting intentions with the view that a shift in acreage from
cotton, wheat and corn to soybeans + weak demand will reduce the need for
Brazilian soybean plantings this year, thus adversely impacting Bunge’s 2009
fertilizer results.
Valuation and risks
We employ a variety of valuation methods for the restaurant, protein and
agribusiness sectors, including multiples analysis (P/E, EV/EBITDA and EV/sales),
DCF models, and sum-of-the-parts models. Key risks include volatility in grain and
energy markets, weather, trade barriers/political tensions, declining consumer
confidence/wealth, and changes in input costs, such as labor.

Table of Contents
Monthly highlights ............................................................................ 3
Commodity highlights ...............................................................................................................3
Restaurant highlights ................................................................................................................4
Outlook – agribus & protein ............................................................. 5
Selectivity is key........................................................................................................................5
Valuation ..................................................................................................................................5
Risks ........................................................................................................................................6
Outlook – restaurants........................................................................ 7
Staying with defensive theme...................................................................................................7
Key commodity pricing trends for restaurants ........................................................................11
Key commodity exposures and earnings sensitivities.............................................................13
Chicken............................................................................................. 15
Beef................................................................................................... 19
Pork................................................................................................... 26
Corn .................................................................................................. 31
Soybeans.......................................................................................... 32
Wheat ............................................................................................... 34