Panera's Not Really Stale

This article is part of our Rising Stars Portfolio series.

I'm on the lookout for solid stocks for my Rising Star portfolio, and my latest potential pick knows how to bring in the dough. Recent pessimism has pushed Panera Bread's (Nasdaq: PNRA  ) share price into more reasonable territory, and the socially conscious halo around its brand makes it an even stronger contender in my eyes.

In May, I covered Panera's experiment in nonprofit, pay-what-you-want cafes, which suggest that altruism could be one of the company's secret ingredients for success. Even its regular cafes have charitable components such as the Operation Dough-Nation program.

Panera's second-quarter financial results also looked impressive. Net income increased 33% to $36 million, or $1.18 per share. Revenue increased 19% to $451 million, and systemwide comps increased 3.9%.

But despite its good deeds and strong earnings, investors don't seem too enamored of Panera at the moment. The stock's down nearly 12% since July 1.

What's taking the rise out of Panera's dough? The company expects to land at the low end of its full-year targets, because of inflationary pressures and the way it's deployed capital. It's guiding for per-share earnings growth of 15% to 20%, company-owned bakery comps growth of 4% to 5%, and "very little if any" operating margin improvement.

Investors should think twice before assuming Panera's gone stale. Inflationary pressures and penny-pinching consumers have hurt even strong restaurant contenders. In Chipotle's (NYSE: CMG  ) recently reported quarterly results, inflation took several huge bites out of its operating margin.

Furthermore, there are far riskier restaurateurs than Panera on the market. Ruby Tuesday (NYSE: RT  ) is shelling out money in an attempt to shift its restaurants to a more upscale feel. Now's not the greatest time for struggling companies to try to reinvent their brands. Sonic (Nasdaq: SONC  ) also struggles beneath onerous debt, while trying to survive the competitive world of quick-serve dining.

Over the years, Panera has struck me as a great company with a too-high stock price. Right now, it's trading at about 21 forward earnings, and sports a PEG ratio of 1.41. Given its recent growth, I'm finding it much more appetizing now, even if it faces near-term challenges. I'm not quite ready to dig in, but I've definitely got a watchful eye on this stock for a possible spot in my Rising Star portfolio.

What do you think? Is it time to buy Panera? State your case in the comments box below, or add Panera to your Fool watchlist.

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