Panera Offers Growth At a Fair Price

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Panera Bread Company (NASDAQ: PNRA), the national bakery-cafe concept with 1,541 company-owned and franchise-operated bakery-cafe locations, just gave us a rock solid 2013 outlook, with room for upside with cash deployment. Lets crunch some numbers first and then analyze the company's growth perspective and the view on pricing.

Some facts on Panera's performance.

a) Consolidated operating margins expanded 80 basis points to 13.6%, well ahead of management's previous outlook for "flat-to-slightly positive" margin expansion. Taken together, earnings per share for the quarter came in at $1.50, exceeding consensus estimates by $0.07.

b) Strong system-wide comparable-store sales growth of 6.0% helped drive 90 basis points of restaurant-level margin improvement to 18.9%, and an 80-basis-point increase in consolidated operating margins to 11.3%.

c) A healthy and stable ROE of +22% and a quarter to quarter ameliorating operating margin of almost 8% give us the idea of a well managed operation, especially when we also see that debt management has also been extremely prudent (as of June 26, 2012, the company has $256 million in cash & cash equivalents, and $0 public debt!).

Panera Today in the restaurant competitive arena; intending to Increase visibility.

Panera has just proven how attractive its story is in the midst of the competitive restaurant environment. In its most recent disclosure, the firm showed how strong its third quarter sales were despite the current weak (although getting better and better by the quarter) spending climate in the United States. The strength Panera intends to play over its rivals in the market is the rich variety of menus that it offers to the market, which it continues to innovate from time to time.

The company has also recently disclosed that it was up for a substantial push towards the use of modern technology in boosting its sales and brand awareness across the country. Actaually, the $250 million worth of revolving funds it was able to acquire from Bank of America strengthened its liquidity position and offered a way to finance the very promising market-boosting strategies the company will play in coming quarters.

The planned startegy for growth.

The current operating margin expansion of Panera is focused on the penetration of urban markets and the creation of more drive-through locations throughout its individual stores. In its recent forecast, the company disclosed its plans of adding a minimum of 115 new stores so that it can penetrate other major key areas that it has not accessed yet. The opening of new stores is expected to intensify the already high current company-owned and store sales of Panera, which were reported to have correspondingly grown by 6.2% and 5.5% in the third quarter. The franchise and wholly-owned stores were able to flourish in the market thanks to their strategic locations and menu prices. Nearly all Panera stores established in the United States today are located in business centers where the lion’s share of the middle market is situated.

Its always a matter of price.

Panera’s relative P/E versus other growth restaurants is decidedly rich, but we believe this is justified by fundamentals: estimates are going up, expectations for EPS growth are accelerating instead of decelerating, and the relative growth story has never looked as impressive. That said, we believe everything is already in the price, and its EV/EBITDA of x12 or its x30 P/E multiple are reflecting the good management the company has put in place and the correct strategy for growth that Panera is currently playing. Just as a little reminder, insiders with somewhat high positions – such as Executive Chairman or CEO – have been selling the stock.

Warren Buffett always explains that it is essential to buy a solid business at fair prices. The blog Warren Trades explains this very clearly. There is a price for everything and investors should pay attention to not only the quality of the business but also its current valuation and growth prospects.

The Big Picture

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martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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