Valuing Fast-Casual Stocks into 2013
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the year winds down and the market is in the middle of a bloodbath going into the holidays, where do the ever popular fast casual restaurant companies stand going into the New Year? Well, assuming we all first defy ancient prophecies on Dec. 21 and turn right around to field one of the most dangerous economic threats to our generation on Jan. 1, next year could definitely be the year for some bullish celebration. Bullish sentiment would bode well for all the growth companies in this sector, but delivering results will, as always, be the ultimate decider. Let’s take a look at just a few of the key players in this industry: Chipotle (NYSE: CMG), Panera Bread (NASDAQ: PNRA) and Starbucks (NASDAQ: SBUX).
Back in the good ol' days at Chipotle, about four months ago, their stock was haphazardly trading at a PE of 50, accompanied by a PEG over 2. Even for a growth stock, these valuations were blatantly obnoxious. The planned opening of 160 new stores in 2012 was mostly to blame for the bid up to these levels, but it became quite clear that it had gotten ahead of itself when the Q2 earnings report rolled in to slam the stock back down to more justifiable levels. A guest appearance by Mr. Einhorn on the name hasn’t made it any easier to recover some of that lost ground, either.
So after paying their efficient-market-dues for the time being, CMG is residing in more negotiable territory, but many still remain wary. One popular belief is that Taco Bell’s cantina menu has and is going to burn Chipotle’s sales, but I personally can’t say that I agree with that one. People actively seek out Chipotle’s food for its renowned quality and worry about the price second. Seeing as how the cantina bell definitely doesn’t beat on quality and doesn’t offer tremendous cost savings either, I can’t see many people choosing the cantina menu at Taco Bell over a Chipotle burrito holding everything else constant.
Expansion internationally, as well as with their ShopHouse Asian Kitchens, will be important drivers to Chipotle's long term growth, and anywhere from 2,000-3,000 new domestic stores have been deemed feasible. Management is also kicking around new marketing mixes that are geared towards strengthening customer loyalty that would positively impact comparable stores' growth, which they have forecasted to decline in upcoming quarters.
While we’re talking food quality for success, perhaps no one demonstrates it better than Panera Bread. Thanks to their fresh plates and comfy environment, Panera continues to drive traffic to their stores, just recently posting a 6% increase in comp sales growth for Q3 and forecasting similar comp sales growth in the mid-single-digit range for 2013. In fact, the company hardly knows the feeling of posting a bad quarter, seeing as how they’ve posted increasingly profitable quarters since 2009.
There’s not much to dislike about Panera; it's a very solid company with no debt and great financing for pursuing new strategies into the future. However, if they start overspending on market penetration rather than on market or product development, they might begin seeing a significant slowdown in traffic.
Last but certainly not least on our list, and in extremely popular demand as of late, is Starbucks. After bouncing back off hard times last Fall to the currently high optimism, Starbucks is moving full tilt into the New Year. They just recently posted a blowout earnings report to end their FY 2012 that entailed a 24% year over year earnings increase, a 6% increase in comp sales, and a 24% dividend hike to ice the cake.
They’ve also been aggressively pursuing emerging markets, recently opening three stores in India and staying on course to owning 1,500 stores in the promising market of mainland China. Starbucks’ channel development segment is an area of the company that’s really starting to impress, on pace to strongly contribute to a continued 10-13% revenue growth. Management did a superb job with product development throughout 2012, picking up the likes of La Boulange and Evolution Fresh, as well as dabbling in the K-cup business, and they’re all poised to begin paying off big time. The roll-out results of Verismo is also expected to boost earnings growth as another strategic diversification vehicle for the company, especially through the holidays.
One of the most important and understated attributes of Starbucks is its brand loyalty, which companies like Apple have proven is simply invaluable. Consumers are willing to go way out of their way and even inconvenience themselves for their products--a perusing of Instagram or MTV will quickly prove the inescapability of that ubiquitous logo. That type of customer commitment is what prevents companies from becoming commoditized, which is especially important in this highly competitive industry.
To Go, Please
The fast casual restaurant segment is loaded with great companies like the ones mentioned here, and picking the winner of the bunch is a difficult call; but they each certainly pose their own unique benefits regardless. Provided we all survive the apocalypse, Bernanke, and the in-laws this winter, these will all be very exciting stories to watch unfold.
Patrock19 has a position in Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.