Why Do Investors Love Panera?

With shares of Panera Bread Co. (NASDAQ:PNRA) trading at around $187.50, is PNRA an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

To answer the question in the title, it’s because consumers love Panera. Yes, the food is good, but the real appeal for Panera is the atmosphere. The only other place that offers a similar atmosphere is Starbucks. However, Panera is bigger in regards to space offered, which often means more comfort. The WiFi is the key draw at Panera. Other restaurants have attempted to match Panera’s approach, but in most cases, it’s just not the same. There is something warm about Panera that is difficult to match.

As far as numbers go, Q1 same-store sales increased 3.3 percent year-over-year. Check growth increased 5.7 percent, but transactions declined 2.4 percent. That being the case, there is more than one way to look at this situation. However, let’s keep it simple. Revenue increased 13 percent year-over-year. Therefore, whatever Panera is doing is successful.

Panera has a stellar balance sheet, and operating margin increased 10 bps in Q1. The latter was mostly thanks to lower operating expenses. This is a tribute to Panera’s consistent focus on efficiency.

Looking forward, a big positive is a strong product pipeline. Chairman and CEO Ron Shaich understands that the industry is an ever-changing landscape, and that he must adapt to future trends before it’s too late. Another important note about Ron Shaich is that he’s passionate about what he does, which is an important trait for a leader. It filters down.

On the negative side, Panera has reduced its guidance for same-store sales to 4.0 to 5.0 percent from 4.5 to 5.5 percent. Some analysts are worried about the decline in transactions over the past two quarters. This is a justifiable concern. If Panera can continue to increase the average sale, then it won’t matter, but the consumer isn’t in the best of health at the moment. Perhaps Panera would be wise to sell a few smaller and more affordable items as snacks and/or deserts in order to get more people through the door. That said, Panera has proven time and time again that it knows what it’s doing. It doesn’t need outside advice.

Other negatives include increased competition and more consumers eating at home to save money. The latter relates to the decline in transactions. This also might be one of the reasons why there is a 6.60 percent short position on the stock. Another potential reason for the relatively high short position is that Panera is trading at 31 times earnings. This will be visited further soon.

The following can be looked at as a positive and a negative. Panera is investing heavily in IT. This investment isn’t likely to pay off for at least one year. Therefore, it could impact earnings over the short term, but it should pay off in the long run.

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The chart below takes a look at some basic fundamentals for Panera, Starbucks Corporation (NASDAQ:SBUX), and Einstein Noah Restaurant Group (NASDAQ:BAGL).

PNRA SBUX BAGL
Trailing P/E 30.59 31.68 20.25
Forward P/E 23.03 23.79 13.43
Profit Margin 8.22% 10.80% 2.78%
ROE 23.18% 28.97% 19.84%
Operating Cash Flow 298.51M 2.55B 38.51M
Dividend Yield N/A 1.30% 3.60%
Short Position 6.60% 1.30% 2.40%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Panera has been a strong performer over the past three years. There have been no sustainable downturns during this time frame.

1 Month Year-To-Date 1 Year 3 Year
PNRA 3.68% 18.05% 33.27% 132.4%
SBUX 1.44% 17.47% 21.17% 150.5%
BAGL 3.71% 16.53% -15.43% 23.38%

At $187.50, Panera is trading above its averages.

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50-Day SMA 184.12
200-Day SMA 168.76

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Panera is stronger than the industry average of 0.90.

Debt-To-Equity Cash Long-Term Debt
PNRA 0.00 323.32M 0.00
SBUX 0.10 1.70B 549.60M
BAGL 4.34 7.47M 130.75M

E = Earnings Have Been Strong

Earnings and revenue have consistently improved on an annual basis. This factor alone separates Panera from most stocks throughout the broader market.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 1,299 1,353 1,542 1,822 2,130
Diluted EPS ($) 2.22 2.78 3.62 4.55 5.89

Looking at the last quarter on a year-over-year basis, revenue and earnings both improved.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 498.58 530.59 529.34 571.55 561.78
Diluted EPS ($) 1.40 1.50 1.24 1.75 1.64

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry             

The industry has been holding up well considering the weakness being seen on Main Street. Factors such as declining fuel prices and food costs have helped a great deal. Barring an unexpected geopolitical event, fuel costs should continue to decline. Demand is weak and supply has increased.

Aside from the consumer, other industry concerns include health care changes and the potential for oversupply.

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Conclusion

Panera has defied the odds and proven skeptics wrong for many years. The stock also held up much better than its peers during the financial crisis. This doesn’t mean Panera is as resilient now as it was at that time, but this should at least offer some comfort. On the other hand, it’s nice to own a stock that pays a dividend during difficult times, which can help ease the pain.

Panera is a well-managed company that has established a strong brand name. Therefore, it’s likely to be a long-term winner. The problem right now is that the stock is expensive in a bipolar market, which isn’t a good combination. At the moment, Panera is a WAIT AND SEE.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.