Rising Star Buy: Panera Bread

This article is part of our Rising Star Portfolios series. Click here to follow Jason on Twitter.

A few weeks ago my family and I stopped by Panera Bread (Nasdaq: PNRA  ) for lunch and I got to explain to my daughters how we actually owned a very small part of the company. This of course made them wonder what in the world I meant, but at the end of the day they found it pretty cool that we get to be a part owner of one of our favorite restaurants.

The company
Panera's no secret. In fact, I've mumbled before about my conundrum between Panera and Starbucks (Nasdaq: SBUX  ) and which one I'd be better off investing in, since both still have enviable growth opportunities and similarly high margins. But I say I can have my cake (or bagel) and eat it too. Panera has over 1,450 restaurants across the U.S. and Canada and it's playing into the growing fast-casual dining segment which I believe is becoming a new standard.

From soups and sandwiches to bagels, coffee, and myriad other delights, Panera is a place where you can eat breakfast, lunch, and dinner. You can even link up your wireless and read for a while. And I suspect that they have a long tail of growth ahead.

Order up!

There are a number of reasons why I like Panera for the long haul. Three in particular are:

  • Where's the growth? The company has over 1,450 stores currently in 40 states, the District of Columbia, and Canada. As they approach the 1,500 mark, management still sees plenty of growth ahead, but it will be controlled, methodical growth planned at about 100 new stores per year over the next five-plus years. This should lead to steady top-line revenue growth for the foreseeable future, and that doesn't even take into account the potential for international opportunities. With a steadily improving net margin line, that opens the door for an increasingly profitable company.
  • Franchise this! Panera's franchise model offers attractive economics. Roughly half of its stores operate as franchises formed under area development agreements, which stipulate standards for timelines in opening stores. Applicants must have a proven track record as multi-unit restaurant operators. While franchise royalties and fees accounted for almost 6% of revenues in 2010, this number will continue to grow as more agreements are made.
  • Management and mission: I am a big fan of Panera's management and mission as well. Founder Ron Shaich is still chairman of the board and owns 4.5% of the shares outstanding. The Panera Cares concept is a great one and it's gaining traction as its non-profit community cafe project. The company's loyalty program is starting to pay dividends, too. One of their latest experiments, drive-thrus, is showing promise as well. The 40 or so stores nationwide that have been renovated with drive-thrus have witnessed a 20% increase in sales thus far.

Did I leave the oven on?
Of course, there are no guarantees, and Panera has its share of risks:

  • Food cost inflation: As with most restaurants, food cost inflation is always a concern. As Panera caters to the fast casual segment with typically higher-priced items, they are more susceptible to this than some. But management is able to pass on incremental price increases to help keep this from getting out of hand. Still, any bump back to another recession would take the rise out of this loaf pretty fast.
  • Fickle pickle: Restaurants are a notoriously trendy market; what's hot today is cold tomorrow. But some stand the test of time better than others. Chipotle (NYSE: CMG  ) is a good example of one that showed sustained same-store sales growth, and I think Panera will see the same lasting success.
  • Supply chain blues: One of Panera's advantages is its internal supply chain which helps supply stores with the freshest ingredients and dough in a timely fashion. Any disruptions or drop in quality could leave a black mark that consumers might not be so quick to forgive.

What we'll pay today
It's tough to value Panera on a discounted cash flow basis because it uses much of its free cash flow to invest in new stores. However, we can look at historical multiples to at least get an idea of what we're paying today. Going back 10 years, the stock has traded at an average P/E of 38.3 and EV/EBITDA of 15.4. Today we are getting shares in a delicious growth story for about 23 times trailing earnings and an EV/EBITDA of 9.7. It's been on my watchlist for a while and I swore if it went below $100 I'd get very interested, so now's the time to act.

Try the panini
This is a growth-based investment, and I fully expect these shares to occupy my portfolio for a very long time. So I'm dropping 6% of my capital ($1,000) on this idea. When you get the chance, swing on by my discussion board and let me know what you think.

Stock Advisor analyst Jason Moser owns shares of Panera Bread. The Motley Fool owns shares of Starbucks and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Starbucks, Panera Bread, and Chipotle Mexican Grill, as well as creating an iron condor position in Chipotle Mexican Grill. 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.


Read/Post Comments (2) | Recommend This Article (15)

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 August 10, 2011, at 11:06 PM, julianewatson wrote:

    Wow, I was really impressed about this. Thanks for sharing this kind of article. It is way cooler than other.

  • Report this Comment On August 11, 2011, at 10:10 AM, TMFJMo wrote:

    Thanks for the kind words julianewatson. I had a lot of fun writing it!

    Foolish best,

    Jason

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1536830, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:35:53 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement