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Analysts Debate: Is Panera Bread a Top Stock?

Alex Planes, Travis Hoium, and Sean Williams
March 21, 2012

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, and we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Panera Bread (Nasdaq: PNRA  ) , a fast-casual dining chain that's popular with Fools across the country.

Panera Bread by the numbers
Panera's been growing quickly over the past decade. Here's a snapshot of the company's most important numbers:


Result (Most Recent Available)

Revenue $1,822 million
Net Income $136 million
Profit Margin 7.5%
Market Cap $4.7 billion
Total Locations 1,541
Franchised Locations 801
Customers 6.5 million per week
Key Competitors Chipotle (NYSE: CMG  )
Starbucks (Nasdaq: SBUX  )
Darden Restaurants
Einstein Noah Restaurant Group (Nasdaq: BAGL  )

Sources: Panera Bread 2011 annual report.

Alex's take
I know there's some friction in Fooldom between growth-oriented stock pickers and more value-conscious analysts when it comes to Panera and Chipotle. Panera has a more reasonable valuation, as its P/E is a notch over 35 right now compared to Chipotle's highly optimistic 60. When viewed next to its peers on a price-to-free cash flow basis, Panera comes right in line with Starbucks and blows Chipotle out of the water. And look at how quickly Panera has grown in the last half-decade:


Locations Open

Growth From Prior Year

2011 1,541 6.0%
2010 1,453 5.3%
2009 1,380 10.2%
2008 1,252 7.3%
2007 1,167 13.6%

Sources: Panera Bread annual reports.

Chipotle grew faster over the past year (13% more locations in 2011 than the year before), but the company's brisk expansion plans are clearly priced in already. Panera's franchisees have already committed to opening 195 more restaurants, which would amount to a 12.7% growth in new locations if opened in the current year.

There are risks to Panera's business model, as other restaurants have caught on to the trend toward healthier fresh food options. But there is still a lot of growth left, and Panera's niche hasn't yet been invaded with success. If Panera's current growth rate of 6% holds up over the next five years, the company will wind up with 2,062 restaurants. I think that's a reasonable expectation, and that makes the company a long-term buy in my book.

Travis' take
When I'm looking at restaurateurs, the first thing I like to look at is the company's following. Is it a rabid fan base or an apathetic bunch just looking for a quick fix? Panera, like Chipotle and Starbucks, falls in the rabid category with an almost cult-like following, something investors should absolutely love. But we need to think about what we're paying for this meal, as well.

When buying a stock, you don't just want to buy a company you like, you want to buy a company you like at a good price. Our outperform call on SeaDrill last week was based partly on a 13 P/E ratio and an 8.3% dividend, a great value for a company that's still growing. This week I'm staring at Panera's menu board wondering if I can afford this stock.

As Alex pointed out, store growth is expected to be just over 7% in 2012 and comparable sales are expected to grow between 4.5% and 5.5%. Those are nice numbers, but they don't justify a 35 P/E ratio or a valuation at 2.6 times sales, in my opinion. They also pale in comparison to Chipotle, which expects to add more stores to a smaller base in both 2011 and 2012, and had 11.2% comparable restaurant growth. Panera simply looks too expensive for me right now.

But I'm not running out to short Panera. That could be a suicide mission if investors keep ordering seconds. But an outright buy at this price is something I'll pass on.

Sean's take
This is one bread bowl I'm definitely sending back on account of being overcooked. Despite being wrong on