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
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)
|Net Income||$136 million|
|Market Cap||$4.7 billion|
|Customers||6.5 million per week|
Einstein Noah Restaurant Group
Sources: Panera Bread 2011 annual report.
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:
Growth From Prior Year
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.
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.
This is one bread bowl I'm definitely sending back on account of being overcooked. Despite being wrong on every occasion previously, I am once again putting myself squarely in front of this fast-moving retail chain and pounding the table to sell the stock. Here's why.
Panera Bread simply isn't driving customer traffic like it once did. According to its fourth-quarter results, customer traffic rose by a paltry 0.2%. The 5.7% jump in ticket sales was Panera's only saving grace and I think that had more to do with Panera increasing prices to match rising input costs than customers actually choosing to spend more at Panera.
Panera has also recently been up against some very favorable same-store sales comparisons. Before you go jumping for joy, remember that winter put a huge dent in Panera's business last year, whereas this year's winter has been practically nonexistent. No one in this country can predict the weather to save their lives, so I would take Panera's easy same-store comparisons through the first half of the year with a grain of salt.
Worst of all, you're receiving no dividend for a company trading at 24 times forward earnings and nearly eight times book. Even Einstein Noah, a company 1/20 the size of Panera, is churning out a 3.3% yield. Similarly, McDonald's offers you a significantly lower earnings multiple, a long history of rising dividend payouts, and a growing customer base. Panera's the type of stock that'll give me indigestion -- I'll pass!
The final call
This was a tough call, Fools! Each of us came at this stock from a different angle, which means that we've got a rare stalemate. Panera's high valuation is worrisome, but not enough for us to collectively give the company a thumbs-down in CAPS. Instead, we've collectively agreed that we'll be keeping a close eye on Panera to see how fast its dough rises, and will be adding it to our watchlist, with an ideal target price of $120. You can add the stock to your watchlist by clicking on this link, which will send you all the important news on this rapidly expanding restaurateur.
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