Can Panera Bread Keep Rising?
John-Erik is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If only I’d been an investor when I first walked into a Panera Bread (NASDAQ: PNRA) more than a decade ago, I might be a rich man today. But can Panera still find a place in a portfolio focusing largely on growth stocks?
If memory holds, that first visit was in the summer of 2000. I loved the place -- the cinnamon crunch bagels, the coffee, the artisan breads -- so much so that when I’d pass one by on a day trip, I’d stop in and pick up some provisions for home. A lot of other folks have come to love the place as well. It recently topped a customer survey conducted by restaurant research firm Sandelman and Associates.
In the time between my first visit and that survey, Panera’s stock ballooned from just $5 a share to more than $150. A legitimate 30-bagger.
When I started sinking money into stocks, I looked at the company. It was selling for $50. One look at the historical prices, and I quickly put Panera on my list of “Stocks I Wish I’d Bought Years Ago.” It’s a list I never should have started making, because it’s kept me away from great companies that still made great investments. Panera’s one of them.
In fact, I think the casual dining chain remains an attractive investment still today, despite its lofty $150-per-share price tag.
Growth Justifies Price
Panera sells at a price-to-earnings ratio of 33, which, at first glance, looks like a lot for a national restaurant chain. McDonald's (NYSE: MCD), the world’s fast-food standard-bearer, sells at just 18.9 times earnings. But growth is where Panera’s focus has been. And when you factor in that growth, Panera suddenly doesn’t look so expensive.
Here’s a look at the price-to-earnings-to-growth (PEG) ratios of Panera and some other popular chains:
(PEG Ratios from YCharts)
Indeed, Panera sells at a PEG just a hair over McDonald’s. By that metric, it looks attractively priced.
Growth on the Horizon?
The question is whether Panera can keep up that growth. It now has 1,541 stores across 40 U.S. states and three Canadian provinces. And while it’s great news for the company and investors, the fact that Panera already made its way to the top of America’s list of favorite eateries makes me wonder how much more that bread’s going to rise before it starts to brown.
Analysts who follow the company are predicting an annual growth rate of 18.27% over the next five years. But quarterly sales from existing stores were up only 5.9% over last year. So where does Panera turn to keep growing?
It’s been expanding its catering services. Catering revenue grew by 29 percent in 2011. CEO William Moreton sees catering as a "huge area of growth" for the company. But even if Panera were to double its catering income over the next three years, it’s still only increasing that overall same-store sales rate to somewhere around 10 percent.
It needs to continue adding successful stores to keep up the growth rate justifying its price. Its plans for 2012 are to add 115 to 120 new stores in the U.S. and Canada, which is still a pretty aggressive expansion. It’s also branching out further into urban areas. Panera has done very well in America’s suburbs and smaller cities, but Manhattan is new territory.
More recently, the company has hinted at expansion abroad, possibly in China. Indeed, the world outside North America remains untapped for Panera. And it’s the key to the company maintaining growth into the future, which is essential for investors who buy to hold stocks, not trade them.
I’ll be keeping my eye on Panera, watching for more about the company’s plans abroad. In the meantime, the company looks attractively priced considering its growth. It may not be the 30-bagger it once was, but Panera can still deliver investors some tasty profits.
Motley Fool newsletter services recommend McDonald's and Panera Bread. The Motley Fool owns shares of Panera Bread. jekoslosky has no positions in the stocks mentioned above. 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.