Is This Stock the Next Starbucks?

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

Every investor has a story about the big winner they missed.

Consider Starbucks, which grew from a single Seattle cafe into a worldwide retail titan. Since the company's initial public offering in June 1992, Starbucks has earned 9,340% for investors.

Today, Starbucks is a mature business. So for big profits, investors should be looking for the next Starbucks among smaller companies with similar characteristics, a long growth runway, and a reasonable valuation.

So, does Panera Bread (NASDAQ: PNRA) meet that criteria? Here's three reasons why Panera could be the next multi-bagger. 

Rapid growth

Panera is in a marketplace sweet spot. Consumers are looking to substitute burgers and fries for wholesome food at reasonable prices.

And this is exactly what Panera offers. High quality meals with an emphasis on fresh ingredients and antibiotic-free meats. 

Results are showing up on the financial statements. Over the past five years, sales and earnings have grown at a 15% and 25% annual clip, respectively. 

Going forward, analysts project Panera to grow its EPS at a 20% rate over the next five years driven by three factors:

Expansion: The company has the potential to double its store count in the United States with international markets almost completely untapped. 

Same Store Sales: Panera is growing same-store sales at a mid-single digit clip. The company's catering service is gaining momentum and now accounts for 8% of total revenue. Panera is also driving traffic through new menu items like the shrimp and soba noodle salad. Yum! 

Margins: Falling wheat prices and labor costs should allow Panera to expand margins. 

Perhaps, the biggest threat to Panera may be Starbucks itself. Last summer, the company acquired La Boulange for $100 million in an effort to beef up its food offerings.

Today, only one third of Starbucks' transactions involve a food item. But management is betting better sandwiches and biscuits could increase traffic and steal sales from rivals like Panera. 

Execution

Founder Ron Shaich is one of the most successful CEO's in history. Shaich has over 30 years of experience in the retail business and has built 1,600 stores across North America. Under his leadership, Panera has become the 14th largest fast-food chain in the United States. 

Panera's financials are in even better shape. The company has no long-term debt, which gives management ample financial flexibility to execute its growth strategy. 

In addition, last year, the company generated $290 million in cash flow from operations which is more than enough to fund the company's expansion. 

Reasonable valuation

This bothers me. 

Nearly every article I've read on Panera goes like this: Great company...great growth...but looks a little too expensive. 

After a 260% run over the past five years, Wall Street has declared you missed the move. 

But, let's take a look at the metrics. 

Panera trades at 23 times forward earnings. Given EPS is expected to grow at a 20% clip over the next five years, the stock is valued at a reasonable 1.15 PEG ratio. 

That's pretty cheap compared to other names in the space. 

Consider Chipotle Mexican Grill (NYSE: CMG). This stock trades at a monster 30 times forward earnings. Assuming a 20% growth rate, Chipotle is valued at a premium 1.50 PEG ratio.

Such a premium is troubling given the company's deteriorating fundamentals.

Last quarter, the company grinded out a meager 1% gain in comparable store sales. Chipotle's margins are also under pressure due to higher prices for barbacoa, steak, and salsa ingredients. 

Panera looks even cheaper against restaurant king McDonald's (NYSE: MCD)?

McDonald's looks pretty cheap at 15 times forward earnings, but that's misleading given the company's slowing 9% EPS growth rate.

After a great run, the company is running into the law of large numbers with same store sales declining 1% in the first quarter.

But why such a premium? Interest starved investors are in a desperate hunt for yields. This could leave the stock particularly vulnerable if interest rates start rising. 

Foolish bottom line

In many ways, Panera exhibits the same traits Starbucks did 10 years ago. Big growth, great execution, and a reasonable valuation is a winning combination that could propel shares higher. 

Investors can be forgiven for thinking that a company that has returned almost 2,500% since going public probably has its best days behind it. But in the case of Panera Bread, there's reason to believe that the best is still yet to come. The stock has been on an absolute tear over the past five years, and you're invited to find out why -- and what else there is to look forward to -- in The Motley Fool's brand-new premium report on Panera. Included are key areas that investors must watch, as well as opportunities and threats facing the company both today and in the long term. Don't miss out on this invaluable investor's resource -- simply click here now to claim your copy today.


Robert Baillieul has no position in any stocks mentioned. 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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