Panera: Cooked Just Right Or About To Burn?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Panera Bread (NASDAQ: PNRA) has been growing at an admirable pace in the last few years. As more Americans have decided that “fast casual” is the way to go, Panera has been adding new bakery cafes and gaining new customers. Each time a Panera Bread location opens, within a short time the store is constantly busy. With over 1,400 locations currently Panera has enough size to be stable and consistent, but yet is still small enough to grow. That's the theory behind buying Panera Bread stock, let's see if the numbers behind the theory make sense.
Panera's Numbers
Current Price: $155.09
P/E based on '12 estimates: 28.15
Growth expected: 18.29%
PEG: 1.54
At first glance we see that the market is willing to pay a premium price for Panera's earnings. This begs the question is the market overpaying? The company Panera is compared to the most is Chipotle (NYSE: CMG). Let's look at the expected growth and PEG of the two companies to see how they match up. Chipotle's growth expected is 21.17% and their PEG is 2.01. This tells us that the market is willing to pay more for Chipotle's earnings than Panera. This is likely because while their future growth is expected to be just a few percentage points apart, their past growth is very different. Chipotle's past growth rate is nearly 40% while Panera comes in at over 24%. In this instance it looks like Panera is highly valued, but not by as much as you would think at first glance.
Panera Bread has a very good balance sheet with about $180 million in cash and no long term debt. I guess if you are looking for a possible issue it stems from what Panera Bread said about its 2011 performance goals versus 2012. If Panera meets its own estimates for 2011 they would grow earnings per share by 28%. However, if you look at management's discussion for 2012, they forecast “earnings per share growth of 16% to 18%” (Panera Bread - 3Q Earnings Report). This represents a deceleration in earnings, and if investors are not expecting this the stock could take a hit. On the plus side, Panera has beaten earnings estimates each of the last 4 quarters so it's possible this streak could continue.
In the end whether Panera Bread is too expensive for your taste depends on what you believe will happen. If you think that Chipotle is fairly valued then Panera may sell at an appropriate discount to its peer's higher growth rate. Do you believe that Panera will continue to beat estimates? Will “fast casual” dining continue to take market share from others? If you answer yes to both of these questions then taking a small bite of Panera at these prices could be a good idea. Just be careful, at current multiples the market expects more than what the company is projecting. The bread has been rising for a while, just make sure you don't get burned by expecting too much.
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