Is Panera Bread Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Panera Bread (PNRA) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Panera's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Panera's key statistics:

PNRA Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q2 2010.

PNRA Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Panera Bread comes through with flying colors, as it's earned five out of seven possible passing grades. One source of potential weakness: Panera's free cash flow has been falling continuously since 2010. However, Panera's shares have staged an impressive comeback over the past three years. Investors seem to be fine with dwindling free cash flow, which is certainly being plowed back into the company's expansion strategy. But does that mean Panera will keep outperforming in the future? Let's dig a little deeper to find out.

Panera recently whiffed on Wall Street's expectations for its latest quarter, which didn't sit too well with investors, who sent shares plunging almost 6% lower. Same-store sales also looked a little weak, with a 3.7% growth rate against the 4.4% projection. Panera's management blamed slowing breakfast sales, which suffered from delayed service, as front-line employees struggled to prepare larger orders.

However, Panera's growth continues -- the company opened 37 new outlets during the second quarter, which brings its total number of restaurants to 1,708. Fool contributor Demitrios Kalogeropoulos points out that the company is aggressively expanding its national footprint, and it has plans to open around 115 to 125 new restaurants by the end of this year. Panera, though catering to a different taste than rival Chipotle (CMG -1.34%), might find value in emulating the latter's buffet-line concept. Chipotle's unique business model enables it to process 350 orders during the lunch hour, serving one customer every 11 seconds. Its proven strength in the quick-service food area lifted same-store sales to 5.5% in the recent quarter, which must make Panera's management a little jealous.

Colorado-based fast-food chain Noodles & Co. (NDLS -7.75%) also seems set to take market share from both Panera and Chipotle. Since 2004, its total number of restaurants increased from 100 to 327, growing at an impressive rate of 16% per year, and it has ambitious plans to launch another 2,500 restaurants over the next 15-20 years. This might be more a direct threat to Panera, as its fast-casual carb-heavy offerings would appear to overlap more directly with the preferences of indecisive diners.

Putting the pieces together
Today, Panera has many of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.