Baking up a Lot of Dough

By Chad Henage - August 6, 2012 | Tickers: BWLD, CMG, MCD, PNRA | 0 Comments

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Panera Bread (NASDAQ: PNRA) has been an amazing opportunity for investors who bought what they knew. Many restaurants make the mistake of assuming that they need to come up with multiple concepts to be successful. However, sometimes the best formula for success is to stick with what you know. This has been the key to Panera Bread's growth, and the company just turned in another impressive earnings report.

In the “fast casual” dining segment, in my eyes there are essentially four competitors. These are companies that have differentiated their offerings, and have managed to successfully duplicate their formula over and over again. While they have huge differences in size and scope, each company has stuck to what they do best, and expanded their options inside the same restaurant. Panera Bread is of course one of these concepts, the others are: Buffalo Wild Wings (NASDAQ: BWLD), Chipotle (NYSE: CMG), and McDonald's (NYSE: MCD). All of these companies cater to a customer who wants an affordable meal with quick service. The difference between Panera Bread and the competition has been the company's consistent ability to grow revenue and earnings at a rate higher than many people expected.

In the most recent quarter, Panera's revenue increased by 18%, and EPS was up 27%. By comparison, Buffalo Wild Wings was able to grow revenue at a greater rate, however, due to high input prices, the company's EPS growth doesn't come close to Panera's. As a larger chain, McDonald's saw much smaller revenue growth and EPS growth. While Chipotle beats Panera on revenue and EPS growth, the stock was already priced significantly higher. This is at the crux of the value that Panera Bread offers investors: good growth with a reasonable valuation. One of the best measures of the success of any restaurant chain is same-store sales growth.

Of the four companies we've mentioned, only one was able to claim better same-store sales growth than Panera, and that was Chipotle. Panera turned in company-owned comparable sales up 7.1% and franchised comparable sales up 4.8%. By contrast, Chipotle's overall same-store sales increased 8%. Neither Buffalo Wild Wings nor McDonald's could compete with these two faster growing companies, as they turned in comparable sales growth of 5% and 3.5% respectively. Given that Panera had the 2^nd best performance in same-store sales, and the second best performance in revenue and EPS growth, all that's left is the question of valuation.

For those who don't believe valuation matters, I would point to the movement in Chipotle's shares since they reported earnings. While the company has a terrific future, the stock was priced for perfect results. Even after the recent selloff, Chipotle still trades at about 35 times 2012 full-year earnings. In a similar situation, Buffalo Wild Wings apparently disappointed investors with their most recent release as well. However, after this company's share price reduction, they now sell for about 22 times forward estimates. Panera Bread by contrast, impressed investors and has a forward multiple of about 27. When you consider that growth estimates for these three chains are right around 20%, it's interesting that there is such a big gap in valuation. I believe this is the key to why Panera offers investors an opportunity at the current time. The company is nearly keeping up with Chipotle's fast growth, and yet sells for a cheaper multiple. Buffalo Wild Wings is in a bit of a difficult situation as their primary product, chicken wings, has led to high input pricing that has negatively affected earnings-per-share. Though the company's stock price is cheaper, until the company can diversify its menu investors need to be aware of this risk. Where McDonald's is concerned, at this point it is more of a dividend yield play than a traditional growth story. The stock is priced accordingly, selling at a forward multiple of around 16. As you can see, it's apparent that valuation does in fact matter and investors will adjust their holdings accordingly.

The nice thing for Panera investors is that the company gave fairly specific guidance on what they expect for the 3^rd and 4^th quarters, and full year results. Analysts apparently are getting tired of underestimating Panera's growth trajectory and have raised their estimates, in some cases above the company's guidance. The end of the year number is really what matters most, and the company expects earnings per-share of between $5.72 and $5.78. At current prices, this gives the shares a forward multiple between 26.9 and 27.1. While I would not call this bargain priced, we are beginning to reach the part of the year where investors start to look at next year's full year earnings estimates. If the company manages to meet analyst expectations for 2013, this forward P/E ratio is about 22. With consistent growth, hugely popular restaurants, an analyst calling for nearly 19% earnings growth, paying 22 times 2013 earnings sounds like an acceptable price. Use this information as a starting point for your own research and see if Panera can help you make some dough in your portfolio.

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