Peter Lynch famously advocated buying what you know. Let's face it, we all know a good sandwich and have our favorite lunch spot. Two of the most exciting plays in the sandwich market are Panera Bread (NASDAQ:PNRA) and Potbelly (NASDAQ:PBPB). Once you know which sandwich you like, it's time to dig in and see which one is tastier for your portfolio.
The original bakery-cafe
At the core of Panera Bread is, you guessed it, the bread. The company basically started the bakery-cafe concept when it was founded in 1981 as Au Bon Pain. Current chairman and CEO Ron Shaich was one of the original founders.
In 1993, Au Bon Pain purchased the Saint Louis Bread Company. Au Bon Pain was sold in 1999 and the company rebranded itself as Panera Bread. Since that time, Panera Bread shares have risen 13-fold and more than $1 billion in shareholder value has been created.
In 2007, Panera purchased a majority stake in Phoenix-based Paradise Bakery & Cafe and the balance of the chain in 2009. As of September, there were 1,736 bakery-cafes in 45 states and Ontario operating under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Cafe names.
Gotta love the bread
At the heart of Panera Bread is, of course, the bread. All of its breads are made from fresh dough using only unbleached flour. Each loaf is freshly baked every morning and throughout the day to ensure only the best and freshest bread is served.
The list of fresh breads include ciabatta, whole grain bread, sea salt focaccia, sesame semolina, country bread, focaccia with asiago cheese, three-seed bread, artisan rye, three-cheese bread, and artisan French bread. Specialty breads include holiday bread, asiago cheese bread, all-natural white bread, tomato basil bread, honey wheat, sourdough, and cinnamon raisin bread.
A look at the stock
Shares of Panera Bread have under-performed the market in the past year with a rise of only 6%. The company has a pristine balance sheet with $193 million in cash and no debt. The current P/E multiple of 26 is still reasonable for a growing company. It's still cheaper than Starbucks, which has a P/E multiple of 35, or Chipotle Mexican Grill, which has a P/E multiple of 54.
A little antiquing
Potbelly started out on Lincoln Avenue in Chicago. It was originally an antique shop and the founders decided to offer their customers sandwiches. Soon lines spread around the door and the concept took off. In 1996, entrepreneur Bryant Keil bought the business and decided to grow the concept.
Now there are approximately 280 company-owned shops in 18 states and Washington, D.C. There are even 12 franchised shops in the Middle East.
Would you like a Box O' or BIGS sandwich?
Potbelly's sandwiches have been made the same way since 1977. The company's toasty warm sandwiches are available on either multi-grain wheat or regular bread. The Box O' refers to the company's Originals, or regular size, and BIGS offers 30% more.
The sandwiches can also be ordered on thin-cut bread, which is basically one-third of the bread on a regular sandwich. Then you can select your toppings and get it the way you like it. There are also salads, soups, chili, shakes, smoothies, and baked goods.
What an IPO!
Potbelly just came public in October and the stock more than doubled in its first day of trading. The company priced its IPO at $14. Potbelly looks a little rich in terms of valuation since the company is still not profitable, but management does expect to turn a profit this year.
The current market cap is $775 million and that values each store at about $2.7 million. The $108.8 million in proceeds from the IPO is to finance growth and that's what investors are buying into.
Basically we're looking at a tale of two sandwich chains. Panera is the more established of the two and is probably a safer bet for investors. Potbelly, on the other hand, is a riskier bet but with possibly more upside potential. Much of this will depend on whether CEO Aylwin Lewis can grow the company and take it to the next level.
With investing, usually you're betting on management. Lewis was previously the COO of Yum! Brands, the parent of KFC, Taco Bell, and Pizza Hut. So he knows the restaurant business and that's what investors are banking on.
For investors, it really all depends on your risk profile. Potbelly, in my opinion, offers the most growth potential and the most upside. There's also downside risk in expanding the chain into new markets and opening new stores. The company must grow revenue in the double-digits to justify a high share price.
Panera is still growing as well. In the third quarter, revenue grew 8% and net income grew 17% compared to the prior year. The company also repurchased $174 million in shares during the quarter. Panera has about $317 million remaining on its current authorization program.
A growing company that is repurchasing shares is certainly a great company for investors to own for the long run.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of Panera Bread. 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.