Editor's Choice

Is it Too Late, or Can Panera Still Make You Some Dough?

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Back in September, I suggested that Panera Bread (NASDAQ: PNRA) was a great long-term investment, and how my wife helped open my eyes to the potential of its particular brand of "fast casual" dining.  While I've always liked Panera, I just didn't really see the upside potential as an investor.  Since the market has been on a pretty strong run in the nearly nine months that have passed, I figured it was time to take a look and see how things have played out.

The bulls are running. Can Panera keep up?

<img alt="" src="http://media.ycharts.com/charts/91de968f755cf85488bf317eb2963ed1.png" />

PNRA data by YCharts

The market has been on quite a run, and despite a strong 12% increase since early September, the S&P 500 has outperformed all of the restauranteurs we talked about back then. While by a slim margin for the fast growers like Panera, Buffalo Wild Wings (NASDAQ: BWLD), and Chipotle Mexican Grill (NYSE: CMG), and by a significant margin to overall loser Darden Group (NYSE: DRI), it's important to remember that we are still years away from Panera's growth plans coming to completion. 

Best operator in its industry

From the FY12 annual report (edited for length, and bolds mine for emphasis):

We’re proud to have exceeded our earnings targets in each quarter of 2012. In 2012, our earnings per share (EPS), excluding a one-time legal charge in 2011, grew 27%. These results were driven by company comparable bakery-cafe sales growth of 6.5%, the opening of 123 new bakery-cafes system-wide at record opening volumes and our strong operating disciplines. ...this was the fifth consecutive year that our EPS has grown 24% or greater and the fifth consecutive year in which we exceeded the upper end of our long-term EPS growth target of 15%-20%. ... It thus seems fitting to us that this year, for the first time in our history, Panera Bread made it onto the highly coveted list of FORTUNE’s “World’s Most Admired Companies", confirming the pride we all feel in Panera.

Panera has shown repeatedly that it can execute as well as any of its peers, and far better than most.  Management consistently delivers the results promised, and as the domestic economy continues to improve, there's little reason to doubt this company will continue to deliver on its commitments to investors. 

Best of the rest

Buffalo Wild Wings continues to grow its business, increasing revenues YoY by over 30% in the quarter ended January 1, and by more than 21% in Q1 of the current FY. And while revenue growth is important, earnings were down by over 10% in the latest quarter, due to a number of factors including increased food costs.  This is certainly something to keep an eye on, but as the company continues to grow (opening its 900th location in North America recently) both its footprint, and with comparable sales up more than 5% this quarter, these lumpy results will smooth out over time. 

Chipotle, on the other hand, is seeing its revenue growth slow, reporting growth numbers in the mid-teens in recent quarters.  But with TTM revenues of $2.8 billion, it's nearly three times larger than Buffalo Wild Wings, $1.1 billion over the past 4 quarters.  And with the exception of the critical football season witch is central to Buffalo Wild Wings' success, Chipotle is growing earnings at a much faster clip between the two.  And lastly, with its new ShopHouse southeast Asian concept in its beginning stages, Chipotle looks to have a lot of growth left.

Last decade's winner

If you invested in Darden in 1995 when it was spun off from General Mills, you've done well, with a return of over 800% including dividends.  Ff you'd invested as recently as 2000, you would have captured over 500% returns.  And if you'd have been willing to make a bet that the economy would bounce back, and that Darden would make it through the recession unscathed, an investment in late 2009 would be up over 90% today, nearly double the strong recovery that the rest of the market has made. 

But I think that bus left the station a long time ago.  Both with its TTM and forward PE valuation ratio over 16, the market is valuing Darden on the higher end of history.  To me that's a sure sign, at least in a large, established company like Darden is today, that there isn't a lot of room to make money.  If the market decides to put it on sale, with a PE ratio closer to the low teens, income investors should consider taking a position, as the company pays a strong dividend of 3.8% based on recent share prices.  But if it's growth you're after, this isn't where you'll find it. 

Foolish bottom line

All four of these companies offer very different cuisine, experiences, and target customers looking for different things, for the most part, so besides all selling food and offering a place to eat it, they don't really compete with each other in significant ways.  Additionally, the slow, yet sustained, improvements in the domestic economy and employment picture should result in improved performance for all four companies, as more folks can afford to eat out.

And if you want an investment recommendation, I'll stick to my guns:  Take a bite of any of the three fast-growing people-feeders above if you're hungry for growth, but wait on Darden if you're after an income-paying Blue Plate Special. It needs to either show earnings growth, or Mister Market needs to catch up to the reality of limited growth opportunity.  What do you think?  Share in the comments below!

Investors can be forgiven for thinking that a company that has returned almost 2,500% since going public probably has its best days behind it. But in the case of Panera Bread, there's reason to believe that the best is still yet to come. The stock has been on an absolute tear over the past five years, and you're invited to find out why -- and what else there is to look forward to -- in The Motley Fool's brand-new premium report on Panera. Included are key areas that investors must watch, as well as opportunities and threats facing the company both today and in the long term. Don't miss out on this invaluable investor's resource -- simply click here now to claim your copy today.

Jason Hall owns shares of Chipotle Mexican Grill. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. The Motley Fool owns shares of Buffalo Wild Wings, Chipotle Mexican Grill, Darden Restaurants, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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