Here’s One Consumer Stock Einhorn is Bullish On

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Most restaurant chains have had a hard-time this year and have underperformed the S&P500. McDonald’s (NYSE: MCD), which is considered to be one of the safest restaurant stocks, has seen a 9% drop year to date as compared to S&P500’s gain of over 13%. Chipotle Mexican Grill (NYSE: CMG) is another chain which has been hit hard this year after consistently outperforming the broader markets for the last 3 years. Starbucks’ (NASDAQ: SBUX) year to date run up also stands below S&P500. However, Einstein Noah Restaurant Group (NASDAQ: BAGL) is one of very few restaurants chains that have had a good run this year. The following chart summarizes the year to date stock performance of these restaurant chains with respect to S&P500.


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Source: Google Finance

Einstein Noah also happens to be the only consumer stock David Einhorn is bullish on. This is a refreshing change from David Einhorn's recent bearish stance on consumer stocks- be it his famous presentation on Green Mountain Coffee Roaster, his questioning of Herbalife's Management or his complete exit from Best Buy. According to his 13F filling, David Einhorn’s hedge fund Green Light Capital holds a large chunk of Einstein Noah shares (10,733,469 shares held at the end of last quarter). What is so unique to Einstein Noah that despite posting lower than expected Q2 results, the stocks have performed relatively better? Well, I think the company has a strong competitive positioning with differentiated offerings. The concept is still in the early cycle of its growth and has a long runway for growth. More importantly, the company’s continuous focus on low calorie and low fat offerings will continue to gain traction as consumers get more and more health conscious.

Healthy Shift to gain consumer traction

Einstein Noah provides a number of healthy offerings including bagel thins, salads and yogurt. However, Einstein Noah’s mix of “healthy” offerings currently comprise less than 10% of the total sales, and I think that offers a great opportunity in the coming years.  The company is focusing on fresh prepared sandwiches and healthy choices at lunch. In its recent earnings conference call, the management has indicated that the company will continue building its uniqueness through Smart Choice menu, which is anchored by our popular bagel thin sandwiches, with 14 options less than 350 calories and 15 grams of fat. So, as this mix increases, I expect the brand to appeal to a broader and more affluent consumer base which will further drive sales growth through both check and traffic.

Strong Competitive Positioning

Though the chain faces local competition from smaller concepts, its brands offer differentiated and more focused appeal than its quick service/fast casuals competitors like McDonald’s and Starbucks. I think Einstein Noah will continue to take advantage of its differentiated quick and high quality offerings to drive long term growth. Einstein Noah has not taken any notable price in the last two years. However, it is among a few restaurant chains that have the ability to increase prices due to the uniqueness of its concept. The chain’s focus on healthy, high-quality menu items combined with rapid service allows the company to price away any commodity threats and will help in driving incremental earnings growth over time.

Effective Hedging Program

Wheat and Coffee provide the greatest exposure to commodities for Einstein Noah. Einstein does a good job of protecting itself from volatility in wheat and coffee prices with its hedging program. Over the past several years, despite extreme fluctuations in wheat prices, COGS margin has remained relatively stable. Moreover, the management has indicated that 90% of wheat and 100% of coffee needs are locked for the remainder of the year, which provides significant visibility into commodity costs. The company reiterated expectations for their COGS basket to be up approximately 2%-3% for the year. Additionally, some contracts have already been locked for 1Q13.

Thus, the company remains immune to volatile commodity prices with an effective hedging program. The company also has the potential to drive SSS growth through increased pricing and expanded menu. Further, the company still has a very small unit base and thus, has the potential to spread its fixed costs over a larger unit base over time. There are multiple opportunities to improve manufacturing efficiencies as well store level operating efficiencies.

Einstein Noah is trading at a forward P/E of 15.56 and has an expected growth rate of 15% over the next 5 years. In addition the company boasts of an attractive 2.80% dividend yield. The risk/reward profile looks attractive and I recommend buying it.

GayatriSharma has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks and is short Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, and Starbucks. 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.

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