Is This Bakery a Buy After Its Recent Pullback?

One of the ways to succeed at investing is to buy during the pullback of a growing and profitable business, as long as it is not too expensive. Since the end of May this year Panera Bread (NASDAQ: PNRA  ) has dropped by nearly 20% from nearly $192 to $153.70 per share. Additionally, Deutsche Bank downgraded the company's rating and lowered the target price from $185 to $145 per share. Could Panera Bread rebound in the future? Let's take a look.

Conservative balance sheet with recent share buybacks
Panera Bread's main revenue and profit source is its company bakery-cafe operations. In 2012, company bakery-cafe operations generated nearly $1.88 billion in revenue, which accounted for 88.2% of Panera Bread's total revenue. The profit from this business segment was $380.4 million, which represented nearly 77% of the company's total profit. In the third quarter, the company increased its revenue by 8%, with 1.7% growth in comparable store sales at its company cafes and a 0.9% rise in franchisees' comparable store sales.

While the company was not so satisfied with its comparable store sales results, it was excited with the fact that the year-to-date sales at new company and franchise cafes surpassed its past-year record levels, adjusting for urban cafes. The number of Panera Bread cafes continues to grow, and the company expects to have more than 125 units opened this year. 

What makes me interested in Panera Bread is its growing stock buybacks. Since the end of the second quarter, the company has repurchased around 1.4 million shares, with total treasury stock of $408 million. After the third quarter buyback, Panera Bread still has nearly $200 million cash on hand. With no debt and $780 million in total stockholders' equity, Panera Bread could be considered quite conservative in its capital structure.

Not so expensive valuation
Valuation-wise, Panera Bread is not expensive. With a total market capitalization of $4.45 billion, the company is valued at around 10.4 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization. Its valuation is much lower than the current valuations of its bigger peers Chipotle Mexican Grill (NYSE: CMG  ) and Starbucks  (NASDAQ: SBUX  ) . While the market values Starbucks at more than 21.5 times its EV/EBITDA, Chipotle is the most expensive company among the three with an EBITDA multiple of 26.1.

Chipotle and Starbucks delivered strong growth
Despite much higher valuations, Chipotle and Starbucks still seem quite attractive with their well-established market positions and their high growth. In the third quarter, Chipotle experienced a 6.2% rise in comparable-restaurant sales, while its EPS grew by as much as 17.2% to $2.66 per share.

A decent increase in Chipotle's comparable restaurant sales was mainly due to growing customer visits, supported by marketing campaigns and faster output. With its strong operating performance in the third quarter, Chipotle confidently raised its full year 2013 comps estimate from low-to-mid-single digits to mid-single digits. The number of new Chipotle restaurants opened this year is expected to be around 165 – 180. 

Starbucks enjoyed the highest rise in comparable store sales at 8% overall and 9% in its Americas and China Asia-Pacific businesses, respectively, in the third quarter. The comparable store sales growth was driven mainly by a 7% surge in global traffic. The growth sustainability of Starbucks lies in the fact that this was the 14th consecutive quarter of comps growth of more than 5%.

With that growth momentum, Starbucks targets opening 600 net stores in Americas and 100 in EMEA in fiscal 2013. In fiscal 2014, the company expects to improve its operating margin by 150 to 200 basis points thanks to strong revenue growth and operational efficiencies. 

My Foolish bottom line
Panera Bread seems to be a good pick after its recent pullback. With a reasonable valuation and growing share buybacks, Panera Bread could provide investors a good return in the long run. However, despite the extremely high valuations, investors might be more comfortable owning Chipotle and Starbucks because of their strong market positions and strong growth in their operating performances.


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