When it comes to restaurant companies this earnings season, we can see quite a divergence of stocks that seem super fresh or sadly stale. Panera Bread (NASDAQ: PNRA ) has often been a market darling over the years, but its recent quarterly results seem to have purged it from many investors' menus.
In March, I purchased shares of Panera for the Prosocial Portfolio I manage for Fool.com. Now that Panera has fallen out of investors' good graces, I'm going to add to the position.
When a stock gets knocked, opportunity knocks, too
I recently looked at three similar quality stocks that are already in the Prosocial Portfolio: Starbucks (NASDAQ: SBUX ) , Chipotle (NYSE: CMG ) , and Panera. I'm basically bullish on Starbucks and Chipotle (I own both in my personal portfolio as well). I wouldn't necessarily say buying either of those stocks would be a tragic mistake for any investor right now, either. Both are well positioned for the future. Both are strong companies with excellent, forward-looking management. Both have great initiatives that should spur growth and differentiate.
However, both have rallied recently. I can't help but think that maybe there are some better deals at the moment.
I'm a real sucker for some temporary price weakness when I can find it; disconnects in the marketplace offer opportunities to buy quality companies for cheaper prices. Let's use Chipotle as an example, once again. It suffered a real plunge last year after I first purchased it for the Prosocial Portfolio. I decided to add to the position at a far lower price instead of running for the exit. (Here's a great article by my colleague Jason Moser, who also took advantage of that buying opportunity, and provides a lesson for Foolish investors.)
I've taken similar steps with a few other stocks in the portfolio, such as Waste Management and Hain Celestial. Honestly, I believe the current rally is overheated and unsustainable, and if an influx of reality and bearishness starts pulling high-quality stocks down, I'll look for even better bargains on the best companies.
Chipotle's price has now pretty much fully recovered after investors temporarily lost their appetite for fairly irrational reasons, such as the idea that Yum! Brands' (NYSE: YUM ) Taco Bell could really hurt the company.
I recently highlighted why traditional fast food like the Taco Bell, KFC, and Pizza Hut brands at Yum!, as well as companies like McDonald's (NYSE: MCD ) , are getting a brand beating. Although KFC is trying to spiff up its image with KFC Eleven -- likely to compete with the likes of Panera and Chipotle -- I say, "Good luck with that."
Several problems have plagued Yum! Brands recently, such as its weak quarter that included a whopping 20% fall in Chinese comparable-restaurant sales due to avian flu and other PR debacles in that country. U.S. comps grew an anemic 1%.
Another traditional fast food rival, McDonald's, suffered a similarly sad quarterly showing. Although Mickey D's didn't have any huge snafus like the China syndrome mentioned above, its results were sad and uninspiring, and management warned of global slowdown in months to come. Like Yum! Brands, McDonald's reported relatively anemic 1% comps growth.
The delicious triad
Many investors balked after Panera's quarterly release, but there was plenty of good news in addition to the bearish factor investors anchored to, and there's certainly no potentially brand-busting situation going down.
Net income increased by 16% to $51 million, or $1.74 per share. Total revenue increased by 11%, to $589 million. Same-store sales growth of 3.8% seemed to be the key factor of concern. The figures missed analysts' projections, and management did ratchet down its 2013 forecast. However, for those who believe Panera is still a major force in the quick-service scene (and a company that can eat away traditional fast food companies' growth hopes), then a little weakness right now is one of those temporary opportunities.
Of the triad that is Panera, Chipotle, and Starbucks, Panera shares have become the best bargain. Panera trades at 22 times forward earnings, while Chipotle currently trades at 32 times forward earnings, and Starbucks' forward price-to-earnings ratio is 28. In my opinion, they all have tremendous growth potential. But Panera's the one in the bargain bin.
Most of us have looked at a menu, spotted several options, and started calculating which option looks best. Sometimes, it's just a matter of looking for the one that sounds like it will be tasty and stick to our ribs and happens to be at a price we're happy to pay.
The Panera concept isn't stale leftovers; I believe it's destined to rise again.
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