Analysts Debate: Is Panera Bread a Top Stock?

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, and we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Panera Bread (Nasdaq: PNRA  ) , a fast-casual dining chain that's popular with Fools across the country.

Panera Bread by the numbers
Panera's been growing quickly over the past decade. Here's a snapshot of the company's most important numbers:

Statistic

Result (Most Recent Available)

Revenue $1,822 million
Net Income $136 million
Profit Margin 7.5%
Market Cap $4.7 billion
Total Locations 1,541
Franchised Locations 801
Customers 6.5 million per week
Key Competitors Chipotle (NYSE: CMG  )
Starbucks (Nasdaq: SBUX  )
Darden Restaurants
Einstein Noah Restaurant Group (Nasdaq: BAGL  )

Sources: Panera Bread 2011 annual report.

Alex's take
I know there's some friction in Fooldom between growth-oriented stock pickers and more value-conscious analysts when it comes to Panera and Chipotle. Panera has a more reasonable valuation, as its P/E is a notch over 35 right now compared to Chipotle's highly optimistic 60. When viewed next to its peers on a price-to-free cash flow basis, Panera comes right in line with Starbucks and blows Chipotle out of the water. And look at how quickly Panera has grown in the last half-decade:

Year

Locations Open

Growth From Prior Year

2011 1,541 6.0%
2010 1,453 5.3%
2009 1,380 10.2%
2008 1,252 7.3%
2007 1,167 13.6%

Sources: Panera Bread annual reports.

Chipotle grew faster over the past year (13% more locations in 2011 than the year before), but the company's brisk expansion plans are clearly priced in already. Panera's franchisees have already committed to opening 195 more restaurants, which would amount to a 12.7% growth in new locations if opened in the current year.

There are risks to Panera's business model, as other restaurants have caught on to the trend toward healthier fresh food options. But there is still a lot of growth left, and Panera's niche hasn't yet been invaded with success. If Panera's current growth rate of 6% holds up over the next five years, the company will wind up with 2,062 restaurants. I think that's a reasonable expectation, and that makes the company a long-term buy in my book.

Travis' take
When I'm looking at restaurateurs, the first thing I like to look at is the company's following. Is it a rabid fan base or an apathetic bunch just looking for a quick fix? Panera, like Chipotle and Starbucks, falls in the rabid category with an almost cult-like following, something investors should absolutely love. But we need to think about what we're paying for this meal, as well.

When buying a stock, you don't just want to buy a company you like, you want to buy a company you like at a good price. Our outperform call on SeaDrill last week was based partly on a 13 P/E ratio and an 8.3% dividend, a great value for a company that's still growing. This week I'm staring at Panera's menu board wondering if I can afford this stock.

As Alex pointed out, store growth is expected to be just over 7% in 2012 and comparable sales are expected to grow between 4.5% and 5.5%. Those are nice numbers, but they don't justify a 35 P/E ratio or a valuation at 2.6 times sales, in my opinion. They also pale in comparison to Chipotle, which expects to add more stores to a smaller base in both 2011 and 2012, and had 11.2% comparable restaurant growth. Panera simply looks too expensive for me right now.

But I'm not running out to short Panera. That could be a suicide mission if investors keep ordering seconds. But an outright buy at this price is something I'll pass on.

Sean's take
This is one bread bowl I'm definitely sending back on account of being overcooked. Despite being wrong on every occasion previously, I am once again putting myself squarely in front of this fast-moving retail chain and pounding the table to sell the stock. Here's why.

Panera Bread simply isn't driving customer traffic like it once did. According to its fourth-quarter results, customer traffic rose by a paltry 0.2%. The 5.7% jump in ticket sales was Panera's only saving grace and I think that had more to do with Panera increasing prices to match rising input costs than customers actually choosing to spend more at Panera.

Panera has also recently been up against some very favorable same-store sales comparisons. Before you go jumping for joy, remember that winter put a huge dent in Panera's business last year, whereas this year's winter has been practically nonexistent. No one in this country can predict the weather to save their lives, so I would take Panera's easy same-store comparisons through the first half of the year with a grain of salt.

Worst of all, you're receiving no dividend for a company trading at 24 times forward earnings and nearly eight times book. Even Einstein Noah, a company 1/20 the size of Panera, is churning out a 3.3% yield. Similarly, McDonald's offers you a significantly lower earnings multiple, a long history of rising dividend payouts, and a growing customer base. Panera's the type of stock that'll give me indigestion -- I'll pass!

The final call
This was a tough call, Fools! Each of us came at this stock from a different angle, which means that we've got a rare stalemate. Panera's high valuation is worrisome, but not enough for us to collectively give the company a thumbs-down in CAPS. Instead, we've collectively agreed that we'll be keeping a close eye on Panera to see how fast its dough rises, and will be adding it to our watchlist, with an ideal target price of $120. You can add the stock to your watchlist by clicking on this link, which will send you all the important news on this rapidly expanding restaurateur.

Still looking for a great addition to your portfolio? The Motley Fool's selected its top stock for 2012, and you can find out everything you need to know with our recently released report, free to readers for a short time. Just click here to find out more while our free report is available.

Fool contributors Alex Planes, Travis Hoium, and Sean Williams hold no financial position in any company mentioned here. You can follow Alex on Twitter at @TMFBiggles, Travis at @FlushDrawFool, and Sean at @TMFUltraLong.

The Motley Fool owns shares of Panera Bread, Darden Restaurants, Starbucks, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Starbucks, Panera Bread, SeaDrill, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended writing covered calls on Starbucks. Motley Fool newsletter services have recommended creating a bear put spread 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 (5) | Recommend This Article (11)

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 21, 2012, at 6:08 PM, bretco wrote:

    There is no mention about the quality of their product. As a fastfood consumer I am regularly disappointed with the quality of the Panara offerings.

    While there is no accounting for taste, gristle in sandwiches, lukewarm soup, slow service and undercooked bacon will not encourage repeat customers.

  • Report this Comment On March 21, 2012, at 6:09 PM, rickyb11 wrote:

    Ate at a Panera last week. If it's cultish they must love non-competitive pricing. Dinner for two - bowl of french onion soup, half sandwich, small order mac & cheese, two sodas - $21.50. Seems way, way overpriced!

  • Report this Comment On March 21, 2012, at 6:26 PM, TMFBiggles wrote:

    Some people think McDonald's is pretty disgusting, and yet it keeps growing year after year. Just because you don't like it doesn't mean that there aren't plenty of fans out there that keep Panera in business, right?

    Don't invest just on your own tastes, look at the way the public reacts. I think a lot of things that are popular are pretty ridiculous, but that doesn't mean I ignore the opportunities.

    - Alex

  • Report this Comment On March 21, 2012, at 6:29 PM, neamakri wrote:

    Two weeks ago I was in Southlake,TX and stopped for lunch at the Panera. Agreed, the price was a little stiff. However the 1/2 sandwich was very tasty and the soup was thick, tasty, and hot enough.

    The restaurant was quiet and clean. The menu was plenty good enough; plus they publish the calories on the menu board. The store location was a very good spot. Note that Southlake has fairly upscale income, so price is not an issue for locals.

    Overall I was impressed. In fact, the only idea I had for improvement would be to put (plastic) flowers on each table for decoration.

    I see from Bigcharts that the PNRA stock price has averaged 50%/yr increase over the last four years. The current P/E is around 33, and the Quick Ratio is at 1.50.

  • Report this Comment On March 21, 2012, at 8:27 PM, logotrix wrote:

    Why do most of these comments sound like restaurant reviews? I think what's being left out of the equation is that this is not fast food, by and large, in the true of fast, as in drive-thru (and yes, I know there are a few exceptions). That aside, I really do think the sandwich is the future. There will always be a demand for fast-food red meat meals, but this isn't where the wind is blowing.

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