Panera Bread Separates Itself Among Restaurant Stocks: But is it Still the Best Value?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite being completely different businesses, Panera Bread (NASDAQ: PNRA), Buffalo Wild Wings (NASDAQ: BWLD), and Chipolte (NYSE: CMG) are always compared. On Wednesday, Panera Bread separated itself from the pack with strong earnings, while the others traded lower following their earnings. However, with Panera trading higher, and both Chipolte and Buffalo Wild Wings trading lower, is Panera still the best value?
This earnings season has been weak across the board, but especially for restaurant stocks. In fact, you can count the companies that have exceeded expectations on one hand, including Panera and Domino’s Pizza. But Panera’s quarter was something to be proud of, especially if you own stock in the company.
The company not only beat bottom line expectations by $0.05, but also easily exceeded sales expectations with growth of 17% year-over-year; more than $7 million above expectations. This strong quarter was due to gains in all facets of the business, expanding operating margins, and 17 new company-owned cafes and 19 franchise bakeries being opened in the quarter. If that weren’t enough, the company upped its guidance, which is pretty impressive in this economic environment.
Obviously, after such an impressive quarter, shares of Panera were trading near all-time highs; meanwhile Chipolte and Buffalo Wild Wings’ drop means a more attractive valuation for both companies. After all, neither had a horrible quarter, but rather some weakness that is looked down upon by unforgiving investors.
Buffalo Wild Wings had decent growth, but cut its forecast and announced higher costs for raw materials, which could cut into margins. Chipolte, on the other hand, is in uncharted territory, after being a consistent momentum stock for the better part of the last decade. It’s now trading near 52-week lows and is facing the same problems as Buffalo Wild Wings, along with slowing sales growth. However, because of its five year rally, the stock is still priced at a premium. Take a look at the basic fundamentals and metrics for these three companies:
|
|
PNRA |
BWLD |
CMG |
|
Price/Sales |
2.37 |
1.71 |
2.83 |
|
Trailing P/E |
32.53 |
25.73 |
28.23 |
|
Forward P/E |
24.37 |
19.06 |
23.30 |
|
Profit Margin |
7.72% |
6.31% |
10.43% |
|
Return Assets |
14.86% |
10.99% |
18.88% |
|
Return Equity |
21.57% |
17.66% |
23.76% |
As you can see, Buffalo Wild Wings appears the cheapest. with a more attractive price/sales and earnings ratio; but it also has higher costs with lower margins. Neither Panera nor Chipolte have servers, kitchen costs, or individual business size that keeps margins for Buffalo Wild Wings lower. Therefore, BWLD is seeing margins that are near max, as is Chipolte with its 10.43% profit margin.
Despite Chipolte trading near 52-week lows, the stock is still the more expensive of the three in terms of metrics. It also has the highest margins and return on equity and assets. Therefore, with higher costs the risks of depressed margins is significant, and when combined with the fact that the company is expected to grow the least of the three (judging by forward ratio), it seems logical to conclude that it doesn’t present the same upside as Panera and Buffalo Wild Wings.
After assessing the earnings, performance, and valuation of all three companies, I believe that Chipolte still presents the most downside, while Panera could still perform well. Panera is more expensive than Buffalo Wild Wings, but because of its growth, guidance, and its improved margins, it is worth the premium and is still a “Buy."
The Big Picture
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BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. Motley Fool newsletter services recommend Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
