Are These Fast-Casual Restaurants a Buy?

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

Americans are becoming increasingly aware of the health issues facing the country and the need for a healthy lifestyle.  At the same time, we are constantly on the move and require the convenience of fast-food dining. While fast food is synonymous with burgers and fries, and the antithesis of healthy dining, fast- casual restaurants have burst on the scene. These restaurants offer a higher quality, healthier product at a similarly reasonable price. We look at two fast-casual restaurants that have been very successful to determine if they are still great investments at current price points. 

Quick Mexican dining

Chipotle Mexican Grill (NYSE: CMG) exploded onto the fast-casual dining scene 20 years ago, and now operates 1,450 restaurants around the country with 12 stores in Canada and Europe. The company offers a relatively simple menu of burritos, burrito bowls, tacos, and salads. Customers have a choice of four proteins and various accompaniments served fresh in an assembly line fashion. The company also makes a strong effort to find quality and sustainable ingredients, sourcing produce from local farmers and buying meat and dairy from livestock raised in a responsible way.

Chipotle saw impressive growth in 2012 as the company opened 190 new restaurants. Revenue increased by more than 20% from the prior year and comparable-restaurant sales growth was 7.1%.  Chipotle plans to open between 165 and 180 new restaurants in 2013. 

A chain alternative to the local deli

Panera Bread (NASDAQ: PNRA) is another fast-casual dining option that has grown quickly.  Panera currently operates or franchises 1,652 bakery-cafes in the United States and Canada. It offers a variety of fresh baked goods as well as sandwiches, salads, and soups. Panera bakes all of its own brands and offers a variety of healthy dining options. The company even has a secret menu that offers diners the healthiest of options if they know to ask for them. 

Panera also demonstrated impressive growth with 2012 EPS growth of 27% versus the prior year on comparable bakery-cafe sales growth of 6.5%.  Panera opened 123 new bakery-cafes during the year; a record number of new openings for the company. 

Pricing in the Growth

Chipotle and Panera have enjoyed very strong growth over the past few years, and their current P/E ratios reflect that growth. Chipotle trades at a trailing P/E of nearly 39.5 while Panera is at about 30.8. Looking forward, Panera is trading at 23.1 times 2014 earnings and Chipotle is at 28.5 times.

While Chipotle is certainly trading at a lofty P/E, and the company has quite a bit of room to grow. Currently there are only 12 stores in Canada and Europe. If the food catches on and Chipotle can successfully source ingredients, international markets could provide a huge growth opportunity for the company.

Additionally, Chipotle has recently experimented in Washington D.C. by applying its methods to Asian food at its ShopHouse Asian Kitchen restaurant. The company currently has one store in Washington D.C. and plans to build another and expand the brand to Los Angeles. ShopHouse could provide a strong growth opportunity for the company. 

Panera currently trades at a more reasonable P/E but also shows signs of continued growth. The company has had five years of at least 24% EPS growth and maintains a long-term EPS growth plan of 15% to 20%.  Panera has also experienced strong growth in its catering business as 2012 catering sales grew by 29%. 

Don't forget the burgers

While not capitalizing on the fast-casual trend, Wendy's (NASDAQ: WEN) is an interesting investment in the traditional fast-food space.  Wendy's operates at the higher-end of the fast food restaurants with better quality ingredients and higher prices. Wendy's also offers a better array of healthy offerings with salads that actually seem like meals and by offering alternatives to french fries with its value meals. 

Wendy's recently announced that it will be releasing a pretzel-bun burger, and this product could prove huge for the company. While it is just a new bun for its burger, there is precedent to suggest that one menu item can be huge for business. Taco Bell's Doritos Locos Taco was an unbelievable success for that company. For instance, same-store sales increased 6% in the first quarter, 13% in the second quarter, and 7% in the third quarter after the launch of the product. Same-store sales had been down 2% in the prior year. If Wendy's can properly market its new burger offering, it has the potential to be a hit.

Wrapping it to go

Chipotle and Panera are trading at high P/E ratios but the growth opportunities abound for both companies. Chipotle is just getting started in international markets and the expansion of its model to other cuisines has strong potential.  Panera has room for expansion and the success of the catering business could reward shareholders. 

Wendy's is about to launch a new product that could drive same-store sales and attract new customers.  All three stocks make interesting investments in the quick- dining business.

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.



John Timmes has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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