Is Panera Bread the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Panera Bread (Nasdaq: PNRA  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Panera.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 19.2% Pass
  1-Year Revenue Growth > 12% 14.0% Pass
Margins Gross Margin > 35% 34.8% Fail
  Net Margin > 15% 7.3% Fail
Balance Sheet Debt to Equity < 50% 0.3% Pass
  Current Ratio > 1.3 1.56 Pass
Opportunities Return on Equity > 15% 18.7% Pass
Valuation Normalized P/E < 20 32.86 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Panera scores five points on our 10-point scale. The breadmaker hasn't rewarded investors with a dividend yet, but it has shown strong growth despite the recession and has plenty of good prospects for the future.

Panera is one of the pioneers of the trend toward fast casual dining, aiming to offer better-tasting food than you'll find at fast-food restaurants while avoiding the fancy-restaurant atmosphere and its associated expense. By avoiding the real estate costs of freestanding buildings, Panera can offer startup costs to potential franchisees that are just over a quarter what McDonald's (NYSE: MCD  ) franchisees pay.

So far, that's been a very successful strategy. Like fellow fast-casual rival Chipotle Mexican Grill (NYSE: CMG  ) , Panera cooked up some strong results in its most recent quarter, beating analyst expectations and raising guidance for the coming fiscal year. Last summer, a foray into the frozen drink arena did well for the company despite a push from McDonald's to go head-to-head against Starbucks (Nasdaq: SBUX  ) .

Those investors looking for huge bargains won't necessarily be happy with either Panera's menu offerings or its shares, which carry a pricey valuation. But the company's ability to raise prices where fast-food competitors like Yum! Brands (NYSE: YUM  ) have faced big difficulty bodes well for the company's margins going forward.

With no dividend, Panera isn't the perfect stock. But with its core concept performing so well, Panera's worth a second look for those looking to get in on a growth opportunity.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Panera to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Panera and Starbucks are Motley Fool Stock Advisor recommendations. Chipotle is a Motley Fool Hidden Gems and Motley Fool Rule Breakers pick. McDonald's is a Motley Fool Income Investor pick. The Fool owns shares of Chipotle, Starbucks, and Yum! Brands. 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 Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2011, at 2:20 PM, LQM2 wrote:

    Einstein said make things as simple as possible, not simpler. Why would you apply the same margin target to a jeweler and a supermarket? And why a PE target without relating to growth? And do you want dividends from a rapidly growing company?

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