Consider Buying Panera on Weakness

On recent weakness, consider shares of Panera because the company's growth story remains strong.

Mar 28, 2014 at 1:03PM

After the company issued soft guidance at its recent investor's conference and received a downgrade from Wunderlich Securities, shares of Panera Bread Co. (NASDAQ:PNRA) dropped over 7% on March 26. The firm lowered its price target for Panera to $190 from $205 and cited "volatile operating performance" that does not justify the company's current market valuation. 

However, Panera still has a solid plan for long-term growth going forward and management has even been revamping the company's customer service platform, which could increase in-store foot traffic and boost sales. With the company now trading at a discount to many peers, the time seems right for investors to consider buying shares of Panera for long-term growth.

Images

Source: Company Facebook 

The downgrade
Analyst Robert Derrington explained why he downgraded Panera after the company offered guidance in a recent investor's conference. He expressed caution on the company's new growth plan:

While that plan ultimately is expected to contribute to stronger SSS, margins are guided lower and EPS is more lumpy and less predictable as management suspended its 15-20% longer-term EPS guidance. Given its expected more-volatile operating performance, we prefer to take a more cautious wait-and-see approach with our investment. 

However, Derrington's call could very well end up being premature because Panera affirmed its previously issued first-quarter and full-year 2014 earnings growth targets. Management at Panera still expects EPS for the first quarter in a range of $1.49-$1.55 and full-year EPS in a range of $6.80-$7.05. Management also expects same-store sales growth at company-owned locations to increase 2%-4%, which is in-line with prior guidance. 

Derrington noted that the management at Panera refused to give EPS guidance for 2015 and beyond, and also noted that recent investments made by the company may impact margins and earnings in the short to medium-term.

The opportunity
Ironically, shares of Panera dropped because the company has better prepared for growth down the road, forsaking short-term earnings power in the process. While it definitely results in a bit of a risk and a headache for shareholders in the near-term, the strategy looks sound for the long-term if it means that the company can continue along its growth trajectory.

The company recently increased its scheduled hours per week by 35 hours and increased its hiring to better serve customers and reduce wait times. Additionally, the company is upgrading its equipment and upgrading its kitchen display units. 

Panera Chairman and Chief Executive Officer Ron Shaich explained, "We believe these initiatives will enable us to better meet our customers' ever-evolving needs and provide the platform for significant growth and expanded earnings." 

The company primarily plans to improve its customer service, which is a large part of why consumers dine at Panera's in the first place. Known for its free Wi-Fi access and its community rooms at many locations, maintaining an inviting atmosphere is crucial for the company.

The in-store atmosphere at Panera's locations separates the company from competitors like Chipotle Mexican Grill (NYSE:CMG), which focuses on moving customers quickly and efficiently through its burrito-building process. While Chipotle is known for its tasty and healthy food, its stores are not known for their inviting atmospheres.

In this way, Panera remains relatively unique. Therefore, any enhancement to the customer service aspect of Panera's business will likely bring rewards for both the company and its shareholders.

Now a value
With the steep drop in share price, Panera has now become a cheap growth alternative to Chipotle Mexican Grill. The company has a forward P/E of 21, way below Chipotle's forward P/E of 35.35.

Expectations still call for the company to grow revenue 7.4% in 2014 and 10.7% in 2015. Although this remains below Chipotle's expected 2014 and 2015 revenue growth rates of 18.1% and 16%, respectively, the company now presents investors with less risk as well.

Images

Bottom line
While many investors have been selling shares of Panera, savvy investors may want to consider buying them instead. The company's growth story remains strong and management has now illustrated that its primary concerns involve long-term growth. While the possible decline in short-term earnings may trouble some, Panera has done this to improve its growth trajectory.

3 stocks to own for the rest of your life, is Panera one of them?
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Philip Saglimbeni owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers