Can Panera Bread Continue to Rise?

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

Editor's Note: Panera's Hidden Menu is available to all, not just My Panera club members. This version has been corrected.

It's warm in here, redolent with the aromas of fresh bread, cheese, coffee, and cheering soups. At three in the afternoon, the traditional lull for restaurants, the cafe is half full with a cross section of hipsters and soccer moms. By the front, among other bakery temptations, you can buy the elusive babka sought by Jerry and Elaine in "Seinfeld." Patrons are working on laptops and files, or eyes closed in bliss, savoring bakery treats.

A twenty-bagger of soup and pastries please

With such a cozy-comfy atmosphere it's not surprising that Panera Bread (NASDAQ: PNRA), owner and franchiser of 1,652 bakery-cafes in the US and Canada, is one of the big stock success stories of the last 12 years creating a twenty-bagger for those who bought in 2001. Even for those who joined the parade in 2009 it's been a five bagger.

Fundamentals here are good, with a PEG at 1.19, and analysts seeing almost 20% five year EPS growth. The P/E is a little higher at 22.76 than the industry average at 18.38, but Panera's earnings have been rising higher than my first baking attempt where I tripled the yeast. That forward EPS growth rate is twice that of the S&P 500.

However, it seems that Panera is resting here at its 50 and 200 day moving average of $163.00, and is down -0.34% over the last year. Does it knead a pounding down (puns intended) to help it rise to the golden yeasty glory of yore?

Proofing Panera

In breadmaking, proofing means to let the dough rest for greater height and volume. I think this is what's happening to the stock--a rest before a breakout.

Panera Bread has many catalysts ahead: its loyalty program is growing, the Board approved a $600 million buyback over three years, and their newest ad campaign "Live Consciously-Eat Deliciously" launched in February (very imaginative, by the way). Their loyalty program has been generating buzz with its hidden menu items with an informative and entertaining website that includes tips for small business owners to find clients.

On Feb. 5 they also reported better than expected full year and Q4 results, with EPS improvement of 34% and 29%, respectively. Operating margins expanded 200 basis points for Q4 and 100 basis points for the full year.

Even with the strong growth shown in 2012, co-CEOs Bill Moreton and Ronald Shaich guided for an additional 17%-19% EPS growth for 2013 and announced that the company plans to open another 115-125 bakery cafes this year.

Other important numbers are a low debt load of $6.64 million to total cash of $297.14 million. Return on equity is 23.49% and institutions FMR LLC and T. Rowe Price hold 9.27% and 7.46% stakes, respectively. Corporate governance risk is a low 3, as measured by Institutional Shareholder Services.

Bullish on bread

I was tempted to use the free Wi-Fi to buy shares of Panera, so impressed was I with its menu and relaxed ambiance. For literally only one or two dollars more than a McDonald's lunch you can get soup and a sandwich. The breakfast menu is easily comparable in cost and size to McDonald's, not to mention healthier. Panera Bread also caters breakfasts and lunches. Not to belabor the Seinfeld thing too much, but it has as many varieties of soup as the fabled Soup Nazi.

My daughter's economics professor eats a Panera lunch every day and explains to her classes what a value it is and why...much like the scene in Trading Places with the lecture about commodities. True, you can't reproduce a Panera lunch at home for much less than at the cafe. They have the advantage when it comes to commodity costs.

Panera Bread's main competition, besides privately owned eateries, is Starbucks (NASDAQ: SBUX) and Chipotle Mexican Grill (NYSE: CMG). Comparing these is more of an apple strudel to apple muffin comparison, but the specialty eateries with slightly higher price points than fast food is the starting point.

All three companies have strong commitments to social responsibility like Panera's Pay As You Please community cafes and daily donations of bread to food banks, and all three take the sourcing and quality of their offerings very seriously.

But the similarities end there. Panera has one tenth the market cap of Starbucks and half that of Chipotle. Both Starbucks and Chipotle have higher P/Es and PEGs than Panera's, just barely above the industry average. Only tiny competitor Einstein Noah Restaurant Group (NASDAQ: BAGL) has a smaller PEG of .97 and P/E of 19.82, but it also doesn't have the big lunch and dinner business (now serving pasta) that Panera does.

Starbucks offers a 1.50% yield (it returned $1.1 billion to shareholders in 2012), and just announced its own loyalty program for Starbucks grocery purchases and at its 18,066 locations, both company-owned and franchised. Starbucks is also an international company

At its shareholder meeting on March 20, Starbucks CEO and founder Howard Schulz announced 18% EPS growth for 2012 despite commodity constraints, almost exactly what analysts expect to be the 5 year EPS growth rate (18.57%).

Starbucks is a good investment and its yield is as enticing as the aroma of a caramel macchiato, but I like Panera better for its growth and opportunities for expansion. Don't forget only a few years ago Starbucks overexpanded so badly that they brought back Schulz to fix the company.

When the nacho chips are down

As for Chipotle, it is down 23.76% over 52 weeks, and competition from Yum! Brands' Taco Bell Cantina menu as well as thousands of private Mexican iterations of its menu still leaves me cold to Chipotle.

The short interest in Chipotle is a high 15.10%, despite its already decimated share price. In its favor it has barely 1% of debt to total cash and a return on equity of 24.28%. Sentiment on the name is decidedly bearish, yet analysts predict 20.22% five year EPS growth and have a median price target of $330 for a 2% upside.

Panera will rise again

All three specialty eateries have underperformed the S&P 500, but with menu items at affordable price points and new marketing initiatives Panera Bread is the winner, and will prove it when they report in May.

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

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