TWST: Janice, what has been going on with the restaurant group from a stock market perspective so far this year?

Ms. Meyer: So far this year is only three months. I'll look a little more broadly than that. The group has been pretty strong, coming off a tough year last year when same-store sales were weak, particularly starting May, when consumers reacted to rising gas prices and pulled back on demand. That was coupled with the strongest commodity-inflation picture we've seen in a number of years. The group has rebounded for two reasons. One is the expectation that demand will strengthen this year, at the very least because of easy comparisons. The second is the expectation that the commodity picture will be better this year and that we have a little more visibility on data. Many of our companies have to sign contracts, and at the end of last year we saw, for example, beef contracts for 2005 would be coming in at half the inflation rate of the previous year. So while we're still seeing some inflation on the food- cost side and some on the labor side, it doesn't seem to be as bad as 2004, and the stocks have rallied in anticipation of better demand and good news on the commodity front.

TWST: Bryan, what's your take on what we've seen so far this year and late last year?

Mr. Elliott: I agree with what Janice had to say. I would also add one other observation. That is, coming off the late-summer lows for the casual dining group last year and continuing to now, I think we've seen an interesting change in character as to how at least the larger casual dining stocks, which are really solidly in the mid-cap growth-stock investor space now, have been reacting to news and how they've been trading on a day-to-day basis. I've been commenting for a number of years on the maturation of the casual dining business ' the generally rising margin, rising return on capital, rising free cash flow, and increasingly healthy business environment and financial picture for the bulk of the companies. And as a number of stocks have moved into that mid-cap investor space, I think we've seen an increasing amount of buy- and-hold mid-cap growth capital flow into them. We reached, I think six to nine months ago, a tipping point, if you will, to the point where that type of capital has sort of taken control of the trading of these stocks from the traditional constituencies, which were more rapid turnover, growth-stock and trading kinds of capital. I think that's something that has helped to increase the valuations and create the strong performance that we've seen since late last summer, early fall, and it's something I think will last some time and create a steady rise in the relative valuations of the larger names ' in the casual dining space, at least.

TWST: Andy, do you see us getting into a maturing phase for casual dining?

Mr. Barish: I think you do have this group being revalued upward as consumer staples rather than as consumer cyclicals, which they've been considered historically. It's just ironic that it's occurring in a period of challenging fundamentals, as we've seen with decelerating sales and earnings growth over the last four or five quarters. Those numbers peaked a year ago in the first quarter of 2004 and, throughout most categories, on a cumulative basis, we've been seeing deceleration over the last four quarters. Perceptually, some of the improvements that are potentially out there on the sales and commodity sides for the 2H of 2005, and maybe even 2006, have been discounted in the stocks at this point. That leaves us wondering what the next leg up in restaurant stocks can be driven by. However, I do think we've had a period where this group has been viewed differently. The valuations on staples, historically, are higher than for cyclicals, and that's been the big- picture change in investor sentiment toward these stocks in the last six to nine months.

TWST: David, what's your view? Are investors' perceptions shifting?

Mr. Palmer: I agree with a lot of what I've heard here, particularly those regarding staples being at a premium to some of the names in our group, particularly the larger fast food names, which have comparable staple-like qualities ' cash flow, return on incremental investment, and exposure to international growth. And I think, particularly as YUM! Brands (YUM) gets into the mega-cap range and as McDonald's (MCD) gets through the volatility of either boom or bust periods, some investors are recognizing that these names deserve some respect. 2004 helped improve the perception of these fast food stocks. In 2004, restaurant industry growth accelerated to about 3% ' up from 1%-2% in 2003. Many restaurant chains and independent operators didn't feel any of that uptick. That was because the major hamburger fast food chains captured over three quarters of the industry growth, even as the US had pretty weak overall consumer momentum and higher energy costs. And I think some folks have begun to see that the staple-like characteristics, even from a domestic demand perspective, are there for these names. Even so, I think there's more upside from here in terms of getting that respect vis--vis the global consumer staple names.

TWST: Andy, as you look out over the next 18 or 24 months, what do you see as the prime trends in the restaurant space? What kind of growth do you expect overall?

Mr. Barish: Over an 18-24-month time frame, I believe you'll see a lot of the near-term challenges normalized. If I were to look at growth rates over that period of time, you will likely have many of the mid- to large cap companies growing in the range of 10%-15%, which, compared to a lot of other industries and the market overall, is a superior growth rate. That's partly driven by unit growth. If you are a casual dining company, in most cases you're still growing units 8%-10%, and I believe the investment community is starting to gravitate toward this industry, just given that unit growth. The quick service category is more mature, but there are growth opportunities in it, too, either internationally or through developing second brands and/or same-store sales. In summary, you have an industry that provides above average earnings growth over that two-year time horizon, and that really doesn't include a lot of the small cap names that we cover that can grow at rates of 20%-30% per year. So it's an industry where, longer term, the growth characteristics are still quite favorable compared to a lot of other sectors and certainly the broad market overall.

TWST: Janice, is this still a growth business despite people shifting to view it as a staple?

Ms. Meyer: The nice thing about the restaurant industry is that you have a little of everything. You have growth names like P.F. Chang's (PFCB); then you have the more mature names, mostly fast feeders like Wendy's (WEN), Yum! and McDonald's;; then you have some in the middle, as Bryan pointed out, names like Outback (OSI), Brinker (EAT), Darden (DRI) and Applebee's (APPB) that are getting more staple-like in their characteristics because people have seen them go through tough times and not disintegrate. They've seen them have down comps, fix the business, and come back even stronger. So while the growth rate has slowed owing to a bigger size and they're not at growth stock multiples, they're also not getting penalized as badly on the downside because, when they hit tough times now, investors don't see it as catastrophe. So you have a little of everything in the group. You're always going to have some growth names because it's a fragmented industry and one with no barriers to entry, which lends itself quite often to new concepts that hit a niche and can grow very, very rapidly for a period of time.

TWST: David, what's your 18-24-month outlook for the group?

Mr. Palmer: Our six- to 12-month outlook really would be for somewhat of a slowdown for restaurant industry growth overall, that slowdown being driven by interest rates creeping up, consumer confidence cooling off, and cumulative job growth not picking up enough to offset that ' and also higher energy costs adding to the pressure on consumers. All that said, you're seeing some easier comparisons in the near-near term, mostly over the summer, from the weather side. That can mitigate some of this. But overall, we believe that folks should be a little more selective. That's true particularly among casual dining stocks, which are more discretionary in nature, in our view, but which are also more affected by weather. I guess long-long term, when it comes to demand, we believe restaurant growth broadly will be not nearly what we saw during the late 1990s. As you tend to see in more mature industries, it will be something barely above population on a real basis, excluding inflation. The keys there are that women are no longer entering the workforce, the baby boom thing has been happening and is no longer an incremental thing, and we don't see consumption really driving outsized gains like you saw in the late 1990s. And, of course, unit growth is not going to reach the levels we saw then. The biggest fast food players, and the mom and pop operators are just not driving unit growth, so you're not going to get that sort of 3% plus unit growth any time soon. But the good news from a restaurant stock perspective is that you don't have unit growth hurting incremental returns. And those improved incremental returns are a key reason we like the fast food guys the most. We also have a positive view on one casual dining player, and note that major casual dining chains are driving growth that is much higher than the industry. But right now we're thinking more selectively, across the board.

TWST: Bryan, what's your take on the longer-term outlook?

Mr. Elliott: I have pretty much the opposite view from the one David just articulated. I think demand on the casual dining side is likely to remain pretty robust. I think eating out is increasingly a convenience and a lifestyle purchase, buying time, particularly for the top-half-of- the-income-stream consumer, the heavy users of casual diners. For those folks it's not really an economic decision to go out to eat at a moderately priced casual dining restaurant. And as long as we don't have a big white-collar unemployment problem, the demand outlook for casual dining, longer term, remains quite robust, and mid- to high-single-digit historical growth rates of demand should remain in place. The demographic groups with the highest propensity to use are empty nesters and recent retirees, and the baby boom is just entering those two phases of the life cycle. So we're pretty optimistic on both the demand and the supply side on casual dining. If you look out more cyclically, obviously there are some potentially increasing headwinds on the low-end consumer, a number of which David articulated well ' energy prices, potential slowing in employment growth, etc. ' and casual diners that are a little more toward the lower-middle income, plus family diners and fast feeders that have a customer base a little further down the income stream, could see less demand growth as a result of those headwinds. But we think the sort of classic bedroom-community, white-collar, two-income family casual dining names have the best and most visible outlook for solid demand over the long term, call it five or 10 years.

TWST: So it's still a growth business.

Mr. Elliott: Without question, in my opinion.

TWST: Bryan, let's flip over to the other side and look at the cost side of the equation. What's the outlook for commodities and costs in general in this space?

Mr. Elliott: We've been pretty bullish on the outlook for commodities for six months or more now, and it's coming together as we expected. On a real basis, food costs have been declining for my whole lifetime, for the most part, with a few spikes due to act-of-God supply disruptions. Mad cow and avian flu, we think, were really the factors behind most of this commodity spike that's getting behind us. Eggs are all the way back to normal, chickens basically back to normal, dairy on the way back to normal. Pork and beef are longer growing cycles, but the herd rebuild in cattle is clearly under way, and as the leading edge of that matures late this year and into 2006, the outlook for normalization of beef prices is coming into view as well. So the secular real decline in food costs, with the world continuing to increase its basic output capability of agricultural products, we think, is still in place. Now, we do expect real rises in labor costs over time ' there's a cyclical component there but also a secular one ' but those phenomena offset each other. All in all, we think, again, for casual dining, which is our focus at Raymond James, the short-term and longer-term cost outlook is reasonably good. Real estate is probably the biggest uncertainty intermediate term right now. The cost of high-quality commercial real estate has been accelerating as the economy has improved ' and of course, they're not making any more of it! ' so that's a potential risk factor as far as returns on capital go. But all in all, we're pretty optimistic on the cost equation for full-service restaurant operators.

TWST: Janice, what's your take on the cost side of this picture?

Ms. Meyer: Not much different. Beef typically runs in a long cycle where low beef prices drive herd sizes down because it's not as profitable to sell cattle anymore, then supply tightens and prices go up until herd sizes are rebuilt, sending prices down again. Bryan pointed out that herds are starting to rebuild but prices are still rising. Chicken has a shorter cycle in terms of breeding; that typically adjusts itself pretty quickly to price changes, so we are not looking for much chicken inflation this year. Dairy has been very funny. I would make a little differentiation there. In the early part of the decade (2002, 2003), you had cheese prices averaging somewhere around $1.10 a pound, and for a good year now, maybe a little longer, you've had cheese prices averaging about $1.55. I don't think anybody really understands what's happened in that market. There was talk about the Monsanto growth hormone being eliminated, which hurt milk production, but whatever the reason, it's been harder to manage dairy in the last year or two than we've seen since the beginning of the decade. But for the most part, for our companies ' excluding the pure cheese players, like the pizza companies ' from a protein standpoint, beef and chicken are getting better. Produce is always a wild card with weather a factor. But again, that's small compared to the main protein. On the labor side, we are seeing some pressure after a long break as several states have raised their minimum wage. Given that labor costs are almost as big as food costs ' in some companies bigger ' this is something to watch.

TWST: David, give us your take on the cost side.

Mr. Palmer: It's hard to build too much on all of these comments. I guess one way to simplify it from our standpoint is to segment the food input costs into the stuff that corrects itself in the near term, as poultry does, and inputs such as beef, which can have protracted supply/demand imbalances for years. But beef is interesting in that you have some pretty big factors with Japan possibly opening its borders, and the US possibly allowing beef imports from Canada later this year. That Canada border issue is obviously a huge situation, and it could go either way for some months. The general expectation for the beef market, though, is that supply is rising even in the near term, and that can be good for beef costs even without Canada ' and that situation could correct itself by the fall. So you really could see a decent correction, particularly against the high prices we saw last year. Looking beyond this year, we think that 2007 is pretty much when we'll see the beginning of a multiple-year downturn in beef prices, since the larger numbers of fed cattle should be getting toward the harvest age. It's just fascinating to think that we could finally go into a multiple-year cycle where beef costs could become an earnings tailwind as opposed to a headwind. You've seen players that deal with more real-time beef costs, like Wendy's , get hammered by beef costs for most of the last four years. To think that could become a tailwind would be interesting. But it's nothing that looks like it's going to happen on a large and sustainable scale for at least another year or so.

TWST: So that's a longer-term bet. Andrew, do you have any comments to add on the cost side?

Mr. Barish: I would wrap it up by dovetailing on that last comment. Most of the restaurant companies are contracted on the major proteins for 2005. So regardless of what happens in the spot market, there's still going to be some margin pressure on the food cost line this year with less of an ability to take pricing increases, in our view, for most of the casual dining players. They were much more aggressive on menu pricing increases in 2004 than they had been historically. So I don't see a lot of margin relief in 2005, and it's a little early to project what's going to happen in 2006. I think one of the other near-term factors that hasn't been mentioned is utility costs. Rising energy prices ' oil and natural gas ' will clip some of these companies a little bit in the winter, first quarter, and then again as we move into the summer months with air conditioning bills and fuel surcharges from distributors. In general, we are in an inflationary environment. We've seen it, obviously, in commodities. Who knows what's next? But to expect a huge amount of margin improvement over the next several quarters is probably wishful thinking.

TWST: You just can't get it back in price increases at this point.

Mr. Barish: I would agree with that. Most of the companies are going to be a little more reluctant to take up pricing than they were in 2004.

TWST: Janice, we've seen a lot of publicity across the country on this whole health issue, and we've seen some of these companies react. Is health going to remain an issue that these companies have to address?

Ms. Meyer: I think health is an issue that the restaurants will continue to address, especially given the aging of the population and the publicity around childhood obesity. I don't think the public really blames restaurants for the obesity problem in the US, though there have been some interesting reversals in recent lawsuits. But regardless of the legal responsibility, most restaurant managements want to be perceived as part of the solution and not part of the problem. Because of that, they are going to continue to promote healthy lifestyles and balanced eating. You can't argue with the results. Wendy's launched new salads several years ago and it added substantial incremental sales to their business; McDonald's launched salads a couple of years ago, and it added incremental sales for them. Numbers speak louder than words. In all fairness, there were other factors before health issues that drove the positive customer reaction, but when you look at total sales, maybe 10% of fast food sales comes from salads. So these companies would be crazy to ignore where the other 90% is coming from, and it's not yogurt parfaits. And in general, the success seems to be more focused on fast food as the broad menus of casual dining may have made them less of a target.

TWST: Bryan, is that what you see as well? Will balance and health be issues for this group?

Mr. Elliott: I think the Ruby Tuesday (RI) example is interesting in that they decided that consumers really wanted to have detailed nutritional information about what was on the menu, so they accommodated that last year. While there were a lot of other things going on there, it appeared that the consumer reacted pretty negatively to the revealing of significant amounts of nutritional data ' and yet it created no lasting negative impact. That's an imponderable. A lot of people talk healthy and then eat what tastes good, and I think that's the reality of how the consumer really responds day to day. But I think Janice's point is well taken that from a PR standpoint and a risk-limiting standpoint, given the litigation situation in the country today, it's important for companies to be out in front of this as much as they can ' you know, to be the good guys from a PR standpoint.

TWST: Andy, give us your views on the health issue in this space.

Mr. Barish: I believe it's about providing choices. It figures that this would be required or demanded by the consumer, given the way they use restaurants today. A decade ago, consumers went out to restaurants on special occasions and didn't feel bad about indulging and splurging; now consumers are dining out more often, and they can't have that double cheeseburger and extra-large French fries and a milkshake every time they go out. Restaurants have to provide a little more balance, as Janice said. So it's about making consumers aware of the fact that there are choices, at least in terms of casual dining. Certainly QSR (quick service restaurants) has responded with major product upgrades. There certainly has been a product upgrade cycle that's been driven by healthier, higher-quality products, whether it's salads or chicken or other items in the QSR segment that you couldn't find four or five years ago. And that has had an incremental positive impact on traffic for the short term. Longer term, it remains to be seen whether that category really expands or whether it's at a point where most of the same-store sales growth is check average and we're back to a market share game ' which, in our view, is probably the case in QSR. But there's certainly been some benefit from providing these healthier items and upgrading menus and delivering those at a higher price point to the consumer.

TWST: David, what's your view on the health issue in the space?

Mr. Palmer: Certainly dieting ' and low-carb dieting in particular ' is down this spring, year over year, according to numerous data points ' such as NPD Diet Tracker and the like. You're seeing it in some results out there. We believe Olive Garden and Red Lobster, for instance, may be benefiting from that unwinding of the low-carb mania at this time last year. I guess the second point is, as Janice was implying before, that providing healthier options is really a brand issue. McDonald's introduced salads, and it got something like 2 points of incremental sales from those salads. But the funny thing is that while they may have had something like 15%-20% of their incremental sales coming from salads, they were having 30%-40% of their incremental sales coming from McGriddle, and 30% plus of incremental sales coming from cheeseburgers during that same time period! So arguably, just having these healthier options did more for the brand and helped people come in and have the same old stuff they normally would have ' and the same old stuff, many times, is an indulgent thing. Longer term, the strategy regarding obesity risk has largely been to tell consumers to exercise more and eat less. The issue will probably not go away. It's interesting to ask: will that work, will consumers become thinner because the companies spread that word and offer healthier choices? It's highly questionable. But with trial lawyers, the media, scientific research maybe softening up public opinion, you wonder if we could be looking at the state attorneys general going after obesity-related settlements in the face of ballooning public health care costs, particularly Medicaid, at the state level. So it's an issue. You wonder if the current strategies are going to work on that front to mitigate potential long-term financial and business-related risk.

TWST: Andy, when you talk to institutions at this point, what's the prime question you're being asked?

Mr. Barish: Valuations. I hear questions from people about where these stocks stand in regard to historical valuation ranges, which, for the large majority of companies ' the mid-cap, mid-teens growers ' would have historically been about 10-12 times forward-year earnings on the low end and then in the 19-20 times range on the high end for p/e's. I still view restaurant stocks as a p/e-driven group, and eventually, I think folks will look at cash flow and free cash over time. For now, however, there isn't really enough free cash to look at that as a real valuation metric for this group. Historically, we have had that range of 10-20 times forward p/e's out there. What we've seen recently, as one of the panelists mentioned at the opening, is that the trough multiples have clearly moved up ' we rarely see stocks below 14 times forward-year numbers now ' and the big question is whether or not peak valuations will be pierced on the upside. Right now we see a number of stocks trading in the 18-19 times range on forward-year p/e's (2005), if you look at the casual dining stocks. There are also a couple of small cap companies in our universe that may not be in the comparables for other panelists ' names like Red Robin (RRGB) and Texas Roadhouse (TXRH) ' which carry higher multiples because of their higher growth rates. Including these names, casual dining p/e's are bumping up against 19-20 times as we speak on 2005 estimates. And in terms of QSR, we've seen a higher-multiple name like Sonic (SONC) in our universe go to 27 times. Overall, QSR p/e's are currently bumping up against 18-18.5 times. So we are at the upper end of historical valuation ranges, and the key question, going forward, is whether or not those multiples can go higher. Those are the questions we're getting from clients most often these days.

TWST: Bryan, how about you? What are you being asked by investors?

Mr. Elliott: I think that states things pretty well. I don't have a lot to add. The primary topic of conversation from a big-picture standpoint is the valuation question on these names. Are we in new territory, in a new set of circumstances, or not? I think more folks are realizing that we are. That means there's a lot of frustration on the part of the traditional constituents of these stocks, particularly the smaller and casual dining names. Folks who have traditionally played these names pretty well and made good money in them have missed this last move. A historical-only look says that you'll get a chance to buy them cheap again, but most of the tape action suggests that maybe that isn't going to happen, barring a real macro problem of some kind developing. So it's an interesting series of discussions. Then you have nontraditional players in the space who are coming in with a different view. They're looking many years out and trying to construct financial models as to what these companies are going to look like three and five years down the road. Those investors, with more of a consumer staple and sleep-at- night stability and visibility mentality, are looking for substantial earnings from here to there and substantial free cash flow and dividend- paying capability. Those are the two different types of conversations I've been having recently.

TWST: Janice, how about you? What are you being asked by investors?

Ms. Meyer: It seems like we're all talking to the same investors. I'm getting similar questions. At the bottom end, the stocks haven't become as cheap as they have in the past. It's probably a little easier as an investor to pay 14 times earnings as opposed to 12 times for a stock if you still think it's going to 18 times; you may not have as big of a run, but you have gotten a good return. The question we're getting is, 'How willing are you to buy something at 20 times?' because then you have to make the bet that it's going to 22 or 24 times and revalue the upside for a company growing 10%-15%. There is still quite a bit of hesitation on that front.

TWST: David, what are you being asked by investors at this point?

Mr. Palmer: The worries out there are about energy prices and the state of the consumer. Certainly people worry about relative p/e levels of the group being toward their highs. But as the panelists have suggested, many investors look at other retail or consumer sectors, which to some extent are also driven by relative EPS growth or EPS growth relative to the S&P 500, and are often priced at a premium to restaurant stocks. S&P 500 earnings growth this year could decelerate from the high teens last year to somewhere in the single digits this year. A lot of the cost side is looking pretty good for restaurants, and sales comparisons are easing in some cases. As a result, relative EPS growth should generally be pretty healthy this year, potentially sustaining these multiples. Also, some of these names have international sources of growth that are quite unique (as in the case of YUM! Brands). With consumer staples names at a hefty premium to big cap restaurant stocks, investors have begun to gravitate to top restaurant names and perhaps close the valuation gap.

TWST: Janice, given all this valuation discussion, what are you telling investors to do at this point?

Ms. Meyer: We've just downgraded one of the more expensive names, Yum!, which is trading at roughly 20 times estimates for this year for a company we expect to grow earnings in the 10%-15% range. Although fundamental trends are good and the company should be lapping high cheese prices from last year, we believe the valuation already accounts for that. To have a price target that gives investors ample upside from here, you basically would need to be paying 20 times 2006 earnings and assuming 2006 is another strong year. Given that we're in early 2005, as well as the competitive sets in their US business and some of the challenges overseas, it's just too early to commit to paying that kind of multiple on 2006 earnings. But in addition to p/e valuations, we focus on return on capital and discounted cash flow to get at the value of our stocks. That is because it is a capital-intensive industry and it is important to factor in the cost of growth, not just growth. And from that standpoint as well, we have found many of the names seeming to price in a lot of good news. I think it was David who pointed out that, owing to the valuations, we're being much more selective in terms of the names that we're recommending. We are not making a broader call that investors should pay 22-26 times earnings for every company in this group and view them as staples just to keep our outperform ratings. Rather, we're being more selective in trying to pick and choose some of the names that we think investors should be willing to pay higher multiples for as justified by the fundamental outlook. We are also looking at names that are turnarounds, where there's upside opportunity to a turn in fundamentals and you can pay a lower multiple for accelerating earnings growth, albeit with a bit more risk.

TWST: Bryan, how about you? What are you telling investors to do at this juncture?

Mr. Elliott: We are focused on the casual dining names. I think that the investment characteristics of some of the mid-cap casual dining names will continue to reward with moderately higher multiples as we move forward. The headwinds that we've discussed for the current year's outlook notwithstanding, I think the potential for pretty good sales and margins and potential earnings revisions to the upside remains at least average, if not a little above average for a number of these companies. Darden and Brinker are kind of in turnaround mode with a couple of their core brands and as momentum builds in that, you typically can get some upward EPS revisions from circumstances like that. Some of the smaller, faster growing names are quite expensive. On a similar vein to what Janice just went through with YUM!, it's harder to make the new money case on some of those at this point. But we think this is an area you want to be sort of buy and hold investing in.

TWST: David, what are you telling people to do at this juncture?

Mr. Palmer: It's hard to generalize, but in general we believe that fast food stocks will continue to be the winners, fundamentally, albeit with less upside over the next 12 months than we saw in 2003 and 2004, when you saw 30% plus returns out of YUM! Brands and McDonald's. Among the traditional fast food stocks, we favor McDonald's. As we've been harping on today, we see benefits from its staple-like characteristics from a consumer demand perspective ' particularly now that it has the Dollar Menu. It's got a 6% free cash flow yield. It's got good return on incremental investments. It's turning into a low unit growth story. Right now, it's priced at a pretty hefty 4.5-5 multiple point discount to its global consumer peers. This is a group that it compares favorably to on an EPS growth and free cash flow yield basis, and is only slightly worse on incremental return basis ' supposedly the Achilles' heel of restaurant stocks. We think that this stock is cheap and we have a Buy-2 recommendation on the stock.

TWST: Andy, how about you? What are you telling investors to do?

Mr. Barish: I'd say we've been neutral to cautious. We have about as many sell ratings as we have buys right now and a bunch of names we think are fairly valued, which are neutrals in our ratings system. The buys have tended to be the names that provide a little more attractive valuation, given our valuation disciplines ' names that might have had some stumbles such as Brinker International and Ruby Tuesday in casual dining. In QSR, we are still recommending McDonald's due to a lot of the points that David made. In small cap specialty or growth names we have buy ratings on McCormick & Schmick's (MSSR) and Panera Bread (PNRA). The sell ratings include Outback Steakhouse, which I think has a core brand that's challenged right now on the sales line and may continue to feel commodity pressures, and also Wendy's. It's going to have a more difficult time bouncing back in its core brand, in our view, given the competitive environment in quick service. I think Wendy's is going to find it a little more difficult to get back to historical same-store sales of 3-4% as we move through 2005. We have a couple of Sell ratings on valuation calls on Cheesecake Factory (CAKE) and CEC Entertainment (CEC), which owns the Chuck E. Cheese brand and a bunch of neutrals, as I mentioned. We've been pretty cautious on the group given mixed fundamentals.

TWST: Janice, you didn't give us any names. What are the top buys you've got in your group?

Ms. Meyer: Let me point out that we don't just have buy recommendations. We did just downgrade Yum! and McDonald's. We actually have a slightly different view of returns than David. We think for some, profit growth may decelerate, and given that capital spending is staying steady, you may see slowing returns at some companies. Comparing restaurants to other consumer multinationals, they tend to be more capital intensive. Even though McDonald's is mostly a franchise business, it still spends almost $2 billion in capital to support it. As I said, we carefully focus on the return side of the business since it's not only what the earnings and the operating profit growth is but how many dollars of investment it takes to get there. That needs to be taken into account in comparing consumer multinationals, as they are not all alike. We do like P.F. Chang's. We think it's a terrific growth name with a relatively unique positioning in Asian casual dining. It has executed flawlessly and has a second concept called Pei Wei, which looks like it's coming onstream very nicely and can provide a second growth leg. It is not a cheap stock, but in this instance we don't see a fundamental risk, and so while it's not cheap, we're willing to stick with it for its future growth opportunities. We also like Applebee's, which is staying focused on one brand in a very competitive category of casual dining. Its entire focus is on making Applebee's better and, so far, management, the menu, marketing and operations have all shown huge improvements. We like what they are doing, think there is room to go, and believe it will shine in its category.

Mr. Palmer: There are two more names I wanted to mention. In casual dining, we continue to like Darden based on our outlook there for upside to consensus earnings and solid relative EPS growth, really driven by more balanced and consistent sales growth between Red Lobster and Olive Garden. I think a lot of folks are still unconvinced that we'll see sustained sales recovery out of Red Lobster. We continue to think they'll have good cost control and improving profitability out of Smokey Bones really could be the story for fiscal year 2006. We also like Starbucks (SBUX) and see significant upside on that name, as well.

TWST: Any names to stay away from, David?

Mr. Palmer: We don't have any Reduces, no.

TWST: Janice, how about you? Any names to avoid?

Ms. Meyer: One of the names we would avoid is Ryan's Restaurant Group (RYAN). The company has continued to struggle to build same-store sales and profitability in a tough segment. Though one of the best operators, there is just so much it can accomplish and that has led to unsatisfactory returns. We don't see that changing any time soon.

TWST: Bryan, how about you? Any names to stay away from?

Mr. Elliott: First I'd like to give my recommendations, then we can talk about the negative names. Among the mid-cap growth names, we also like Darden and Brinker. I mentioned their recovery turnaround and upside earnings potential. Cracker Barrel (CBRL) is a name that hasn't been mentioned yet here, but it's a stock we have a strong buy on at Raymond James. We think it's exceedingly undervalued and there's a secular margin story that the market has not fully realized yet. It's been masked a bit by their high commodity exposure last year. We think the current fears about gas prices have made that a great buying opportunity here. Among smaller cap names, we think RARE Hospitality (RARE) is the next company that emerges into that mid-cap space and gets the kind of multiple that is reflective of high return, high quality, open-ended growth opportunities. A smaller cap turnaround name that we're increasingly intrigued with recently is California Pizza Kitchen (CPKI). There's a new prototype. About 18 months ago the founders came back into management after a decade or more of just being on the Board and uninvolved in day-to-day management. They've experimented with a new prototype that really changes the concept from sort of an upscale pizza parlor into a full-bore casual dining dinner house. They're getting a significantly higher dinner mix and, therefore, more alcohol sales and gross margin dollars per customer out of the handful of prototypes. But if it works, as they remodel most of the rest of the chain and start to open units with that format, it could see substantial rises in per-store sales, margins and EPS. A couple of new management catalyst names, smaller cap, that we think are very interesting are IHOP (IHP) and Steak n Shake (SNS), both of which are icon brands and have been around for a long time. They weren't that well managed historically, and yet they've survived and prospered because they kind of had some cult status with the consumer. They both have had very professional and strong new managements over the last couple of years that have resulted in some very strong same-store sales growth. Margins and EPS growth are still lagging a bit as we make investments in both of those brands, but they're a couple of smaller cap stocks that have pretty interesting intermediate- and longer-term growth potential. As far as names that we're avoiding, we don't really have any hard sells at this point, given the positive investor sentiment view that we have. But I agree completely with what Janice said about the quality of P.F. Chang's as a business. They certainly have an A plus quality management team there and a great growth outlook, but it's hard to make the new money investment case at this point. We'd like to buy that a little cheaper. Similarly, Cheesecake has great returns, a great story and plenty of growth visibility left, but they're a little expensive here. You have to take a very long-term view to buy it here. Similarly, Panera, which is a business that we like a lot and a stock that we've liked a lot in the past, is kind of on a short squeeze pop here and it probably has entered a correction period within the last couple of weeks and we'll get a chance to put new money into that somewhat below current levels.

TWST: Andy, as you look at the space, are there any new small names that catch your eye?

Mr. Barish: As investor appetite has increased, there's certainly been the opportunity to see some new companies coming public. As I mentioned, in the last couple of years, Red Robin, McCormick & Schmick's, Texas Roadhouse and Buffalo Wild Wings (BWLD), which we don't cover, have gotten access to the public markets through IPOs. My guess is there will be a few more in 2005, not only growth concepts but also potentially some more mature concepts that may have been under-managed, or brands that have been around and are now starting to pursue growth opportunities that could move those into the public markets, as well.

TWST: Let's turn the tables here. Do any of you have a question you'd like to ask the rest of the panel?

Mr. Barish: I'd like to get a sense of what the panelists think happens in the three- to five-year investment horizon if we really are talking about an industry that is going to generate more significant levels of free cash flow over time. Basically that implies that at some point, unit growth is going to have to slow down for cap ex to slow down noticeably to generate that significant increase in free cash flow. So what happens when that moment is reached or seen by the marketplace?

Mr. Elliott: I'll jump on that one. Assuming that we continue to have return on capital treated no worse from a tax standpoint than it is now, i.e., dividends, maturing casual diners down the road could become substantial dividend payors (at least on current market caps) and be in a position to be growing that dividend at something several times the rate of inflation or GDP growth. These could be great buy and hold investment vehicles to provide income growth well above inflation for owners and turn them into stocks that you want to own and help supplement baby boomer retirement.

TWST: So they can become the P&Gs of the next decade.

Mr. Elliott: I think that possibility exists and, in fact, that's my most likely scenario at this point.

Mr. Barish: Bryan, don't you think that before they realize that, returns on invested capital are going to deteriorate and most of these management teams are going to probably go a little too far with unit growth?

Mr. Elliott: Down the road, in the third and fourth generations of professional managements that are taking over from the founding managements, which tended to be more entrepreneurial and growth- oriented, I see an understanding of the reality that growth for growth's sake is a fool's errand. They realize they are stewards of capital, and when there are lowered incremental returns on new store capital, then it's time to move that into the cash cow quadrant of the spectrum. I think the unit growth rates have been fairly well contained here. People understand that we can't outgrow our ability to grow management teams and pick good sites and operate the stores well. These are 20-year capital commitments when you open a new restaurant and for many years these chains have not been growing for growth's sake. I think there's a discipline there and an understanding among the senior management teams that will prevent that from occurring. Implicit in that is the assumption that the demand side for casual dining remains similarly well above rates of population plus inflation, etc. If we mature into a zero real demand growth mode, then that scenario you discussed would then become more likely.

Ms. Meyer: I would just add that while that second and third generation of management probably isn't as growth-oriented in terms of pushing units of the core concept, many have looked toward acquisitions for growth. I think that is where we may run into risk, because many acquisitions don't work out. So whether you're wasting capital growing the existing concept and cannibalizing sales or whether you're wasting capital buying a concept that doesn't work, it may in the end produce the same negative result on returns.

TWST: David, anything to add to this Roundtable?

Mr. Palmer: I think it's interesting. I am not sure that we've seen a lot of these new generation managers, particularly in the small to mid- cap companies. But, for instance, you see the likes of Brinker and Wendy's. They have hired some folks from big consumer products companies. You've seen HR programs targeting top-notch brand managers who often have significant innovation experience, or that are more in touch with systems and processes to measure consumer satisfaction and operations excellence on a more real time basis. And you're certainly seeing better capital management in some cases at these companies. I think that aspect of it is actually pretty good news. It will be neat to see if some of these companies can evolve their company into the big time in terms of brand and capital management with new generations of management by sculpting a brand and making that brand connect with core consumers. Hopefully, they'll do it with a brand that's under their nose and not just try to proliferate the number of brands that they manage.

TWST: Thank you. (TJM)

Note: Opinions and recommendations are as of 4/7/05.

ANDREW M. BARISH Banc of Americas Securities LLC 600 Montgomery Street San Francisco, CA 94111 (415) 913-5312

BRYAN C. ELLIOTT Raymond James & Associates 3414 Peachtree Road, NE Suite 1250 Tower Pl. 200 Atlanta, GA 30326 (404) 442-5856

JANICE L. MEYER Credit Suisse First Boston Eleven Madison Avenue New York, NY 10010 (212) 538-4337

DAVID PALMER UBS 1285 Avenue of the Americas New York, NY 10019

For disclosures, please see www.twst.com.

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