We Have A New Leader

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

For all those investors who still think Chipotle (NYSE: CMG) is the growth leader in the fast casual restaurant industry, I have two words for you, Panera Bread (NASDAQ: PNRA). I'm sorry Chipotle fans, but Panera is just a flat out better deal today. The two companies are both growing fast, but Panera's diversified menu and cheaper valuation make this our new leader.

A Whole New Industry
Over the last several years, a whole new segment of the restaurant industry has developed. The concept of a “fast casual” restaurant seems to have a broad appeal, and until the last year, Chipotle was the category leader. Chipotle has been admired by other writers and myself for their efficiency, cash flow generation, and huge growth. The fact that a Chipotle can be run by a handful of staff, generates huge profits, and can be located in any strip mall, seemed to make this chain unbeatable. By contrast, Panera Bread and their larger footprint, more diverse menu, and greater staffing needs seemed a nice second choice. 

Sure there are other companies that offer fast service and a good selection. Who could talk about the restaurant industry and use the word fast without mentioning McDonald's (NYSE: MCD)? I would also argue that Panera's main competition includes companies like Starbucks (NASDAQ: SBUX) and Dunkin Brands (NASDAQ: DNKN). Let's face it, if a customer wants to pick up a quick bite to eat and a drink, McDonald's, Starbucks, or Dunkin Donuts fits this bill. All of these companies offer a selection of food and drink that is quick to prepare, and is relatively inexpensive, so what makes Panera different?

It's Comfortable”
If you ask many customers what draws them to Panera, a common response is, “it's comfortable.” Think about it for a minute, at a traditional McDonald's the goal was always to get the customer in and out of the store. The company is beginning to remodel stores to make customers more likely to stick around, but most people think of McDonald's as more fast than casual. The image of Dunkin Donuts increasingly is that of a drive-thru window. Dunkin Donuts doesn't exactly go out of its way to offer seating, with limited options, if any, at many of its stores. Chipotle's is much the same with hard metal and wooden chairs, and sparse decorations or reason to stick around. Starbucks is closer to Panera Bread's feel with free Wi-Fi, and comfortable seating. However, of all of these chains, Panera offers a larger restaurant that can accommodate more guests. 

The other part that makes Panera Bread comfortable for customers is the diversity in their offerings. While most people think of Starbucks and Dunkin for coffee, McDonald's for fast food, and Chipotle for burritos, Panera has fans of many of their menu items. When you can go to one restaurant, get your food quickly, everyone can have something different, and the price is right, a restaurant is going to be popular. When you add in the fact that Panera keeps coming up with new menu items, you have a company that can grow both externally and through their menu.

Comfortable This...It's Growth That Matters
It's all well and good for diners to be comfortable with a restaurant, but unless the company is growing many investors won't care. The good news for investors is, Panera is reporting excellent growth, and 2013 looks like another banner year. 

Panera's recent earnings were impressive on all fronts, a 15% increase in revenue, and a 23% increase in EPS were just the headline numbers. The company also saw system-wide comps up 4.9%, and the company's weekly sales have increased each year for the last four consecutive years.

What really sets Panera apart is their projections for 2013. While investors aren't surprised when companies like McDonald's and Dunkin Brands suggest low single-digit comp. growth for the year, this was a shocking revelation from Chipotle. In fact, Chipotle said they expected, “flat to low single-digit comps for 2013”. Panera on the other hand said they expect, “between 4.5% and 5.5% comparable same-store sales”. Of the restaurants we have looked at, only Starbucks matched this view suggesting “mid-single digit comp. sales growth”.

It's really no surprise then that Panera also sees strong EPS growth for the year. The company expects 17% to 19% EPS growth for the full year, which compares favorably to McDonald's at about 8%, Dunkin Brands at 15.6% to 17.9%, and even Starbucks at 15% to 20%. Chipotle is expected to report 17% EPS growth, and even that might be a stretch based on slowing comparable store sales.

On a valuation basis, it's hard to bet against Panera Bread over their competition. Using the PEG ratio, you can see how favorably Panera compares to its peers:

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>P/E on 2013 Est.</strong></p> </td> <td> <p><strong>EPS Growth</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> </tr> <tr> <td> <p>Chipotle</p> </td> <td> <p>31.26</p> </td> <td> <p>20.22%</p> </td> <td> <p>1.55</p> </td> </tr> <tr> <td> <p>Dunkin Brands</p> </td> <td> <p>24.36</p> </td> <td> <p>15.43%</p> </td> <td> <p>1.58</p> </td> </tr> <tr> <td> <p>McDonald's</p> </td> <td> <p>16.39</p> </td> <td> <p>8.71%</p> </td> <td> <p>1.88</p> </td> </tr> <tr> <td> <p>Panera Bread</p> </td> <td> <p>23.11</p> </td> <td> <p>19.08%</p> </td> <td> <p>1.21</p> </td> </tr> <tr> <td> <p>Starbucks</p> </td> <td> <p>26.1</p> </td> <td> <p>18.57%</p> </td> <td> <p>1.41<span> </span></p> </td> </tr> </tbody> </table>

As you can see, Panera Bread is relatively cheaper than its competition across the board. Considering Chipotle's growth numbers actually look worse than Panera, how do you argue that Chipotle is a better value at this point? The answer to that question is, you don't. Panera has been the more consistent performer, and their broader menu insulates them from input cost pressures. The company is off to a great start for this year, and with a stock relatively cheaper than any of its peers, PNRA should be at the top of any growth investors' Watchlist.


MHenage owns shares of McDonald's. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, 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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