Will Panera Burn Investors?

With shares of Panera Bread Co. (NASDAQ:PNRA) trading at around $179.90, 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

Panera generates more traffic than most of its peers, it offers comfortable and casual atmospheres, and it dominates the bakery-café business. Therefore, it should be a great investment. After all, it has been a great investment thus far. However, past performance doesn’t guarantee future success.

Here are some positives for Panera:

  • Consistent annual revenue growth
  • Consistent annual EPS growth
  • Excellent balance sheet
  • Superb innovation
  • The Goldman Sachs Group (NYSE:GS) set a $215 price target on the stock
  • Plans on opening 125 stores between now and the end of the year
  • Beat expectations last quarter
  • Strong guidance
  • Strong margins
  • Likely to buy back shares in the future

That’s the good news. Here are some current negatives for Panera:

  • Decline in comps growth
  • Increased competition
  • More consumers eating at home

Going back to the list of positives, if Panera is planning to open more than 100 stores by the end of the year, then the company is clearly optimistic about its growth potential. Companies, or special eateries in this case, don’t open more stores if they’re struggling. That said, the decline in comps growth from the low double digits to the long single digits is concerning.

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The chart below compares basic fundamentals for Panera, Chipotle Mexican Grill (NYSE:CMG), and McDonald’s Corp. (NYSE:MCD). Panera has a market cap of $5.26 billion, Chipotle has a market cap of $10.66 billion, and McDonald’s has a market cap of $103.10 billion.  

PNRA

CMG

MCD

Trailing   P/E

30.59

39.24

19.18

Forward   P/E

22.08

27.76

16.27

Profit   Margin

8.14%

10.18%

19.82%

ROE

23.49%

24.28%

36.82%

Operating   Cash Flow

$289.46 Million

$419.96 Million

 $6.97 Billion

Dividend   Yield

N/A

N/A

3.00%

Short   Position

N/A

15.60%

N/A

 

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

E = Equity to Debt Ratio Is Strong        

The debt-to-equity ratio for Panera is much stronger than the industry average of 0.90. Panera has managed debt extremely well.

Debt-To-Equity

Cash

Long-Term Debt

PNRA

0.08

$297.14 Million

$6.64 Million

CMG

0.02

$472.86 Million

$3.53 Million

MCD

0.89

$2.34 Billion

$13.63 Billion

 

T = Technicals Are Strong     

Panera has performed well over the past three years. The 2008/2009 financial crisis was also nothing more than a footnote for Panera. This type of resilience is difficult to find.

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1 Month

Year-To-Date

1 Year

3 Year

PNRA

10.90%

13.30%

11.28%

114.90%

CMG

6.53%

15.08%

-20.78%

176.00%

MCD

2.89%

17.19%

9.70%

63.04%

 

At $179.90, Panera is trading above all its averages.

50-Day   SMA

165.38

100-Day   SMA

163.25

200-Day   SMA

161.07

 

E = Earnings Have Been Solid                       

Revenue and earnings have consistently improved on an annual basis. While many companies have seen setbacks in 2012, Panera hasn’t even blinked.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

1.30

1.35

1.54

1.82

2.13

Diluted   EPS ($)

2.22

2.78

3.62

4.55

5.89

 

Looking at the previous quarter on a year-over-year basis, there were improvements in revenue and earnings. There were also improvements in revenue and earnings on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

495.76

498.58

530.59

529.34

571.55

Diluted   EPS ($)

1.31

1.40

1.50

1.24

1.75

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 Do Not Support the Industry

As mentioned earlier, more consumers are eating at home. This trend will likely gain momentum. However, this was also the case in 2009, and it didn’t have a devastating effect on Panera. Another industry headwind has been increased food costs, but we’re most likely heading into a deflationary environment. The good news is that food costs will decrease. The bad news is that consumer demand will weaken.

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Conclusion

Panera is an extremely well-run operation. The dilemma is that discretionary spending is likely to decline, which has the potential to weigh on high expectations for Panera. If the stock market can hold its own or perform well, then Panera is an easy OUTPERFORM. However, that’s not likely to be the case. Therefore, Panera is a WAIT AND SEE. The silver lining is that Panera should be able to weather a steep market correction better than most stocks.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial adviser before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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