Bargain Bagels Could Bring Bidders
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Pumpkin bagels weren't enough to save Einstein Noah (NASDAQ: BAGL) from announcing some surprising bad news about its upcoming 3Q 2012 results on Tuesday. The bagel shop now expects weaker financial results for the quarter and mentioned that it plans to take out more loans.
Although Einstein Noah held out the possibility of a dividend payout from the loan funds to convince investors to stick around, a bigger attraction for this bagel shop remains the possibility that another company might buy it. A look at three companies with similar business models shows why an Einstein Noah buyout could happen.
The announcement guided expectations lower for both revenue and earnings, which sent Einstein Noah down 9.6% at the Tuesday close. The Associated Press explained that instead of earning $3.6 million and reporting $108.3 million in revenue, Einstein Noah now forecasts $3.4 million earnings and $105.5 million in revenue. Although this announcement resulted in a selloff for good reason, it could actually make the buyout argument more attractive.
Einstein Noah's post-selloff 14 forward P/E and 1.21 PEG could mean a better deal for an acquirer. Although these figures don't suggest that Einstein Noah is undervalued, the bagel shop looks a lot cheaper than one coffee shop in the midst of the buyout process right now. Marketwatch reports that on Oct. 26, Peet's (NASDAQ: PEET) shareholders will decide whether to accept Joh. A. Benckiser's bid. Peet's currently has a 32 forward P/E and a 1.84 PEG, with the minor advantage of a 3.8% profit margin that beats Einstein Noah's 3.5% figure. The Peet's bid could be good news for Einstein Noah shareholders who want an acquisition to happen, since Einstein Noah might find a buyer willing to pay a premium itself.
A prospective buyer might also consider Caribou Coffee, (NASDAQ: CBOU) with a $253 million price that's slightly less than Einstein Noah's $273 million figure. Tuesday's selloff brought Einstein Noah's PEG closer to Caribou Coffee's 1.2 PEG, and Caribou Coffee trades for a significantly higher forward P/E of 22. Although these valuation figures show that Caribou Coffee does expect higher growth than Einstein Noah, any potential buyer will have its own growth plans for Einstein Noah and might decide that paying the forward P/E premium for Caribou Coffee isn't necessary. Einstein Noah's profit margin surpasses Caribou Coffee's 3.2% profit margin as well.
A buyer could avoid coffee entirely and go for Jamba Juice (NASDAQ: JMBA) and its fruit smoothies. With a market cap of $161 million, Jamba Juice won't cost a buyer as much as Einstein Noah, but Einstein Noah looks like a healthier company. Einstein Noah comes out well in a comparison with Jamba Juice, since Jamba Juice has a 23.7 forward P/E and a 6.05 PEG. Turning around Jamba Juice, which has a negative 1.18% profit margin right now, could be harder than turning around Einstein Noah.
Einstein Noah doesn't come in first on the profit margin comparison, but Peet's slightly higher profit margin comes at a sizable premium. Einstein Noah definitely looks like the cheapest choice for a potential buyer based on the forward P/E metric. The selloff suggests that Einstein Noah sees trouble ahead, and the bagel shop's 3Q 2012 results will probably disappoint, but the announcement does create an opportunity for individual investors. The Peet's acquisition shows that a buyer could be interested, and the comparison with Caribou Coffee and Jamba Juice shows why Einstein Noah could be a better acquisition candidate, so Einstein Noah does look more likely to be acquired now.
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