This Restaurant Stock is a Good Buy

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

Panera Bread Co. (NASDAQ: PNRA) is set to report its 4Q12 earnings on Feb. 6 before the market opens. Panera has been one of the most consistent companies around, having beaten the consensus estimates for EPS and the company’s mid-guidance for the 19th quarter in a row when it reported its third quarter earnings in October. The company continues to deliver very strong and consistent fundamental growth, furthering the tradition from prior to (and throughout) the recession, and is among the fastest growing chains in the restaurant sector, with huge potential for additional expansion. 

Panera’s valuation relative to other growth restaurants is definitely rich, as the company is trading at a forward P/E of 22.58, compared to the restaurant industry average of ~15x. However, the shares appropriately deserve a premium valuation given above-average unit growth (+7%), strong same store sales, high new unit returns, strong cash flow/balance sheet (no debt), and conservative share buyback guidance. Let’s compare some key valuation metrics of Panera with its peers, including Chipotle Mexican Grill (NYSE: CMG) and Starbucks (NASDAQ: SBUX).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Chipotle Mexican Grill</p> </td> <td> <p>Starbucks Corporation</p> </td> <td> <p>Panera Bread</p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>29.41</p> </td> <td> <p>21.63</p> </td> <td> <p>22.58</p> </td> </tr> <tr> <td> <p>PEG Ratio</p> </td> <td> <p>1.69</p> </td> <td> <p>1.37</p> </td> <td> <p>1.37</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>3.59</p> </td> <td> <p>3.05</p> </td> <td> <p>2.21</p> </td> </tr> <tr> <td> <p>Price/Book</p> </td> <td> <p>7.23</p> </td> <td> <p>8.00</p> </td> <td> <p>5.77</p> </td> </tr> </tbody> </table>

We can see that Panera is not that expensive after all. The company looks significantly undervalued whichever way we look at it. It has the lowest Price/Sales ratio, as well Price/Book ratio. Moreover, the company is trading in-line with Starbucks and at a significant discount to Chipotle, despite having a similar growth profile, and thus looks attractively priced on a PEG basis. Although Chipotle and Starbucks provide stiff competition which is not going to go away anytime soon, Panera scores over Starbucks and Chipotle in the breakfast segment as it offers a much wider variety of breakfast items. Moreover, the company has on-site kitchens that further enhance its breakfast reputation over its peers.

Going forward, I remain confident about the company’s ability to operate under a tough macro backdrop. The average check for Panera (~$9.50) is significantly lower than the usual $12-$15 range at which mid-scale casual restaurant chains operate, and thus the company is likely to attract consumers who are looking to trade down from pricier restaurant chains. While most of the restaurant chains experienced diminishing same store sales during the 2008-2009 economic slowdown, Panera actually posted an impressive store sales growth of 3%-3.5%. Thus, I believe Panera exhibits recession-proof characteristics and is a safe bet even during a slowdown.

The company is consistently buying back its shares, which will further support to share price. The company last year announced a three-year share repurchase program to buy back up to $600 million worth of its common stock. Some investors may be concerned over why the company did not increase the size of its authorization. However, it should be noted that the company is opening units at a more aggressive pace than was the case three years ago, and buying back franchised units opportunistically where it thinks it can gain operating leverage. Even as Panera accelerates new unit development in North America while buying back shares and franchised units, the company’s ability to generate a 2%-3% free cash flow yield (one of the highest among growth companies in the restaurant industry) remains a key positive. Hence, I remain optimistic about this company and rate it as a buy.


thefoolishsaint has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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