Can Panera Recover After a Disappointing Second Quarter?

Panera Bread’s (NASDAQ:PNRA) stock price was down more than 8 percent intraday on Wednesday, after the company’s less-than-stellar second quarter earnings announcement. While one earnings miss doesn’t mean game over for Panera, the company also lowered its guidance for the rest of the year. Is Panera losing its footing in the quick casual restaurant space? Let’s use our CHEAT SHEET investing framework to decide whether Panera is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Panera reported second quarter earnings per share of $1.74, underperforming analysts’ estimates by $0.02. The stock price has responded severely to this earnings miss, and is down 8 percent in Wednesday’s intraday session. However, Panera demonstrated mostly positive results in its report.

Comparable store sales — arguably the most important metric in the restaurant and retail industries — increased 3.8 percent. Diluted EPS and revenues were up 16 percent and 11 percent, respectively, for the quarter. Investors were disappointed by a decreased yearly earnings guidance due to lower projections for same-store sales growth.

E = Excellent Performance Relative to Peers?

Panera stacks up well against two of its biggest competitors in the quick service restaurant space: Chipotle (NYSE:CMG) and Starbucks (NASDAQ:SBUX). All three of the companies have high price to earnings multiples relative to the S&P 500, because of the attractive economics and high growth rate of the quick service restaurant space.

However, Panera’s multiple is the lowest of the three. Additionally, it has the lowest price to sales multiple, and the lowest price to earnings growth ratio, implying that it is the best value of the group at its current price level. Panera has a high return on invested capital thanks to its franchising model, through which it receives annual royalties from franchisees at a low operating cost.

PNRA CMG SBUX
Trailing P/E 27.46 42.33 34.20
Price/Sales 2.42 4.17 3.61
PEG Ratio 1.41 1.84 1.58
Profit Margin 8.22% 10.13% 10.18%
ROIC 23.03% 22.68% 25.89%

T = Trends Support the Company’s Industry

There’s a reason why Panera and two of its biggest competitors all have high price to earnings multiples, compared with the S&P 500 — the quick service restaurant industry is a rapidly growing industry in the U.S. A Hoover’s study estimates that sales growth in the quick service restaurant space will increase every year by 8 percent until 2016. Diners have been opting for these types of restaurants instead of fast food, because they are generally healthier and have higher quality food. However, with the industry’s low barriers to entry, Panera and other established restaurant chains will face increasing competition in the coming years, which may hurt both sales and margins.

T = Technicals on the Stock Chart are Solid, Except for Today

Panera is currently trading at around $166.60, below both its 200-day moving average of $174.96, and its 50-day moving average of $187.11. As you can see from both the 50-day and 200-day moving averages on the chart below, the stock has experienced a long-term uptrend. However, the share price was down more than $15 in Wednesday’s intraday session, after the second quarter earnings report. Panera’s stock has a history of responding sharply to earnings news. Investors thinking about initiating a long position in the stock could use the recent pullback as an opportunity to buy shares at a cheaper price.

Conclusion

While Panera Bread’s second quarter earnings announcement disappointed investors, the company continues to demonstrate same-store sales growth, healthy profit margins, and solid revenue and earnings growth. On a comparative basis, Panera is cheaper than competitors Chipotle and Starbucks.

The company has a history of offering successful menu items and its franchise model — in which around half of Panera’s stores are owned by franchisees — gives it a virtually guaranteed revenue stream every year. The recent shellacking of the stock price gives investors a nice pullback at which to buy the stock. Panera is an OUTPERFORM.

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