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Worst Stock for 2009: Panera Bread

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Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.

Panera Bread (Nasdaq: PNRA  ) stock has held up remarkably well in a year that's been terrible for most stocks. Unfortunately, I don't see much justification for its resilience in the face of the economic storm. That's why I've got a big thumbs-down on this stock for 2009.

Tasty food, not-so-tasty stock
Every time I've eaten at Panera, I've enjoyed the experience. However, that doesn't necessarily make it a great stock idea.

Sure, McDonald's (NYSE: MCD  ) is doing great, but its food is cheap and fast, which is definitely resonating with consumers in these days of economic malaise. Let's not forget Mickey D's buddies Burger King (NYSE: BKC  ) , Chipotle (Nasdaq: CMG  ) (Nasdaq: CMG-B  ) , and Wendy's/Arby's. Plus, Panera has historically had a difficult time luring as many people into its stores for evening meals, and consumers have plenty of options for those.

Furthermore, when it comes to a higher-end crowd that might be on the lookout for coffee and pastries, Panera competes with companies like Starbucks (Nasdaq: SBUX  ) , which has also been suffering, but is a significant competitive challenger to be sure.

Of course, Panera's menu items aren't dirt cheap or high-end. I have a feeling the Panera experience rests in a middle-of-the-road, out-of-the-way niche that increasingly money-conscious consumers might simply … forget.

Meanwhile, even though investors seemed to enjoy Panera's most recent quarterly results, my Foolish colleague Kristin Graham pointed out that most of that performance was due to menu price increases. Transactions were actually down 3%, signaling declining customer traffic. I can't imagine that trend hasn't continued in the fourth quarter, or that 2009 will see much of an uptick in traffic given the economic headwinds, which have gotten worse and worse.

Over the past 12 months, Panera's stock price has surged more than 30%. However, when you look at the company's financial data over the same timeframe, it's hard to imagine why investors have been so incredibly optimistic about this particular stock.

Granted, over the past 12 months, Panera's revenue has grown 24.3%, and that is impressive. However, over the same period, Panera's earnings have grown only 2%. Think about the fact that it's trading at 26 times trailing earnings, and you see there's a major disconnect.

Analysts seem to expect Panera to report a 22% increase in earnings for all of 2008, meaning it would have to pull off a tremendous fourth quarter. That sounds like a major hurdle to jump given how bad the fourth quarter was for so many companies. With the exception of a few outliers like Wal-Mart (NYSE: WMT  ) , retail got ravaged. Somehow I find it hard to believe Panera bucked the ugly trends, particularly since it's been utilizing menu price increases when most consumers were desperately seeking deals.  

Meanwhile, if you look at Panera's annual data for the last several years running, you'll see a slowing growth trend even before the recession began. 2005 was a great year for Panera -- revenue increased 33.6%, gross profit was 36.8%, and earnings surged 35.3%. However, growth has been consistently slowing. Fast-forward to the end of 2007 and you find revenue increased 28.7%, gross profit was 32.4%, and its earnings decreased by 2.4%.

This stock might get stale
Panera will have to deliver some awfully high growth to justify its current high multiples, and that may make it one of those doomed stocks you should avoid. Even in good times, any whiff of disappointment can send such pricey stocks crashing, and given the current ugly times, I'd say Panera will probably be a big disappointment in 2009. I simply don't think it can pull it off.

What do you think, though? If you agree with me -- that Panera is going to be the Worst Stock for 2009 -- go to Motley Fool CAPS and rate it an "underperform." We will reveal Foolish readers' prediction for the Worst Stock for 2009 next week.

Enjoy Panera's fresh-baked bread -- but save your other kind of dough and seek out another stock for 2009.  

Chipotle has been recommended by both Motley Fool Hidden Gems and Motley Fool Rule Breakers. Wal-Mart Stores and Starbucks are Motley Fool Inside Value picks. Starbucks is also a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks and Chipotle. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On January 28, 2009, at 4:02 PM, pleached wrote:

    Alyce, you blew this call. PNRA has not only performed will the last few quarters, they have done so in an environment that saw the costs of raw ingredients go through the roof. By leveraging the pricing control that they do have and some thoughtful, margin-enhancing menu changes, PNRA has plowed nicely through extremely rough seas. As commodity prices adjust to something more sane and as consumer spending begins to once again wake up ( ok, not holding my breath on the second one ), I expect PNRA to yield outstanding returns.

    ( Note, you are correct about slowing growth in the rear-view mirror, but if you check trailing 10Qs you'll see that they've corrected some issues that were screwing their margins ).

  • Report this Comment On January 28, 2009, at 5:21 PM, kc2344 wrote:

    Alyce, once again the fool is living up to its name! Look for PNRA to blow away the street in Q4, this concept is recession proof. My information tells me that panera is locked in for the year (better than last) for wheat which should mean alot of dough! The current ecomonic climant bodes well for financial sound companies, this should help leverage PNRA negoitiate lease deals for new cafes. I tend to read the fool then go the other way..if they ever become handicappers I'd be a millionaire.

  • Report this Comment On November 18, 2009, at 6:03 PM, Eefin wrote:

    Panera's consumer base expands through verbal means of loyal customers. They refrain from television broadcast and so far from my understanding, billboards. The only advertising they do is radio. This method seems to be very affective at slowly building a strong returning customer base. As their demand increases they've progressively upped their prices.

    Their business model, in terms of profit seems to follow the classic growth model of a market economy with its repetitive peaks and troughs as they climb in profit. Their store locations are strategic so they receive a progressive influx of customers towards the 3rd and 4th Q. It's at this point they convert new-comers to loyal purchasers.

    I think Panera Bread is a company you'll have to wait awhile to see growth, but its solid.

    On a side note, I'm unsure if the all time high prices they're charging at a time where prices and incomes are actually beginning to deflate will grab as many customers in what is expected to be a very lackluster 4thQ.

  • Report this Comment On February 17, 2011, at 1:14 PM, nadeem0322 wrote:

    Wow, I would hate to be whoever wrote this article. To be so, so wrong two years in a row...

  • Report this Comment On May 13, 2012, at 7:09 PM, ohaaron wrote:

    Panera just made it into the Fortune 1000. You fail!

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