This morning, Panera Bread (NASDAQ:PNRA) had one of those stock price charts where it appears as though the apocalypse came along, and the market just disappeared. The weak earnings report that the company released yesterday sent the shares down almost 7% overnight, after a 2% drop late in trading on Tuesday. Panera now trades at a price-to-earnings ratio of 26.7, pulling it closer to its competitors.
Actually, that's not entirely true. Panera's drop pulled it closer to companies such as Darden (NYSE:DRI) -- operator of Red Lobster and Olive Garden -- and Jack in the Box (NASDAQ:JACK), which also runs Qdoba. It fell away from what seems like its closest competitor, Starbucks (NASDAQ:SBUX). But that's not necessarily a bad thing for investors.
The valuation game
Using P/E ratios to measure the relative cost of stocks is a tricky system, but within a sector, it does give investors a good idea of what kind of expectation is built into a stock price. In general, the more growth that we expect from a company, the higher the P/E ratio is going to be. Investors are willing to pay more now for bigger gains in the future.
With a P/E of 26.7, Panera is still above the restaurant average P/E of 21.7. That means people are expecting Panera to grow faster than the average company within the sector. Starbucks is further ahead, at 34.4, while Darden sits below the average at 15.6, and Jack in the Box is right in line with Panera, at 26.3. So what does that really tell us?
What it doesn't tell us is something intrinsic about the companies. The P/E ratio is not a measure of how good a company is, only what the market thinks about a company. The drop in Panera's price indicates that the market is worried about the future prospects for rapid growth -- with some good reason.
A shortfall in the second quarter
Panera's earnings release contained a few bits of bad news. First, its comparable-store sales grew slower in the second quarter than expected. While it had forecast a year-over-year increase of between 4% and 5% at company-owned locations, it managed growth of only 3.8%. That led to a slowdown in revenue growth, which led to a slowdown in profit growth.
All the pulling back means that the company had to reforecast its future earnings -- which had the biggest impact on the stock price -- pushing annual earnings per share growth down to between 15% and 16%. Originally, the company had forecast earnings growth of between 17% and 19%, per share.
The competition and the bottom line
Getting back to the comparison to peers, Darden is looking for a drop in EPS of between 3% and 5% for its next fiscal year, because of a set of increasing costs. Moving up the chain, Jack in the Box is expecting to grow EPS by 29% and 30% on an operational basis -- it only forecasts based on continuing operational income growth.
Starbucks leads the pack in cost on a P/E basis, but the company is in the middle in terms of growth. The company is looking for between 18% and 22% annual EPS growth this year. The reason it's still much more expensive than Panera is threefold.
First, the market is having a knee-jerk reaction to the Panera earnings statement, probably driving the stock lower than it "deserves." Second, Panera is in the middle of a string of decent, but not great, news. The stock has been puttering along over the last year, so there's no momentum to push the valuation higher. Third, Starbucks is probably seen as a safer bet, since the company has been making lots of good decisions recently. Its expansion into more food items is being touted as a real winner, and its recent acquisitions are seen as good investments in the future of the business.
Overall, I agree with the market. Panera is a good business, and it certainly has more going for it than Darden, which has been sluggish recently. But Panera is still figuring things out. While I'm not looking to expand my restaurant holdings, if I were, today's drop might offer a good place to jump in. I still believe in the company, and the price change today is largely justified. If I could only pick one, though, I'd shell out and get Starbucks -- the future over there looks very bright. Check back on Friday morning to see if my trust is misplaced.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Panera Bread and Starbucks and owns shares of Darden Restaurants, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.