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A Hidden Gem Among Restaurants?

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Any real bagel connoisseur knows that the only place to find truly exceptional bagels is New York City. The locals will tell you it's something in the water, which may be the case, but you can't get that crusty shell and soft and mushy interior anywhere else.

The problem for bagel lovers is most can't make the trip to the Big Apple whenever they're hankering for a bagel. Fortunately for carbohydrate lovers everywhere, Einstein Noah Restaurant Group (Nasdaq: BAGL  ) has been delivering quality bagels and sandwiches at some 700 locations nationwide. Even better for investors, management has managed to turn a once-foundering business into a well-run fast-casual restaurant chain.

The company
Einstein Noah sells bagels and sandwiches under three brands: Einstein Bros. Bagels, Noah's New York Bagels, and Manhattan Bagel Co. The company divides its business into three segments: company-owned stores, franchised locations, and a commissary and manufacturing segment that makes products for the restaurants and franchisees.

While this small-cap stock flies under the radar of most investors, famed hedge fund investor David Einhorn has taken notice. In fact, his hedge fund Greenlight Capital (Nasdaq: GLRE  ) now has a 65% ownership stake in the company. Einhorn's hedge fund has returned 22% on average annually since its inception in the mid-1990s, so investors should not take his bullish bet lightly.

The company has certainly been through its share of rough times, including a Chapter 11 bankruptcy filing in 2000, when the company was 51% owned by Boston Market. In 2001, the company's assets were acquired, and were then reorganized into a flourishing business that went public in 2007.

With close to 700 stores, Einstein Noah is the largest bagel company in the country by a wide margin. On its most recent conference call, executives noted that the company is on track to meet its expansion projections for the current year. The expansion includes 10-12 new company-owned stores, as many as 17 franchised locations, and some 35-45 licensees.

Open all day
The company has been introducing new and successful product lines to compete at all hours of the day. While it is foolish to compare Einstein's growth to fast-food chains such as McDonald's (NYSE: MCD  ) , Burger King (NYSE: BKC  ) , Chipotle (NYSE: CMG  ) , or even Starbucks (NYSE: SBUX  ) , the company has been able to grow successfully in ways that these companies have not.

The company derives more than 65% of its revenue from higher-margin breakfast sales, a number that would make McDonald's and Burger King jealous. In fact, quick-serve restaurants such as Mickey D's, Burger King, and Wendy's/Arby's (NYSE: WEN  ) are making increasing pushes into breakfast.

Einstein's recently introduced pretzel line has brought new customers in looking for snacking options, a segment that Chipotle has not yet figured out. And while the company's coffee won't really put a significant scare into Starbucks, it has been able to draw customers that know they will be able to get a full meal as well. A more apt comparison would be to Panera Bread (Nasdaq: PNRA  ) , but Panera's sandwiches are priced at a significant premium to those of Einstein Noah.

Looking for balance
Admittedly, the company does not have the strongest balance sheet, with $100 million in debt and only $9.4 million in cash. However, the company's cash has been put to good use through marketing campaigns for its new bagel thins sandwiches, which have already become their top sandwich line.

Also take into account that management locked in more than 85% of its wheat needs for the remainder of the year before the massive increase in prices, so the company is in a good position to improve upon its margins, at least for the near term.

The Foolish bottom line
Einstein Noah is positioned strongly for strong earnings growth as the economy continues to recover and consumers eat out more. The company's plethora of healthy breakfast, lunch, and snacking items keep the revolving door moving at the store locations. It may not taste like New York bagels, but the company's growth could be just as sweet.

Tell us what you think about the business and the bagels in the comment box below.

Interested in reading more about Einstein Noah Restaurant Group? Add it to My Watchlist, which will find all of our Foolish analysis on this stock.

Andrew Bond owns no shares in the companies listed. Starbucks is a Motley Fool Stock Advisor pick. Chipotle is a Motley Fool Rule Breakers recommendation. Chipotle is a Motley Fool Hidden Gems selection. The Fool owns shares of Chipotle.  Try any of our Foolish newsletters today, free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 24, 2010, at 12:25 AM, hammerswinger wrote:

    good bagels

  • Report this Comment On September 24, 2010, at 9:58 AM, shaileshnita wrote:

    I looked at it financial for the past 3 years. I am not convinced that it is growing or likely to grow. Besides, it has phenomenal competition from big-name stores. Also, the concept of traditional breakfast (the specialty for this store) is disappearing. I believe the share-prices are likely to be flat.

  • Report this Comment On September 29, 2010, at 4:25 PM, Origin97 wrote:

    PNRA is a much better choice. 3 Paneras have opened near me, and The Einstein that opened near-by closed. It only stayed around for about 12 months.

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