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Panera's Comparable-Sales Growth Conflicts With Its Valuation

By Michael Lewis – Feb 20, 2014 at 1:31PM

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In the long run, this fast-casual business will surely grow. But today's stock price does not present the best value to investors.

Is Panera Bread (PNRA) losing its steam? The company has posted a few quarters of sales and/or earnings misses, but we all know that quarterly estimates aren't the end-all of business analysis. What's more pressing here is the precedent that management is setting and the still-ambitious valuation that the stock holds. At roughly 22 times earnings, Panera is a company that should be hitting at least low-double-digit sales growth, but we aren't likely to see more than 8% in 2014. Sure, the macroeconomic environment is weak, but Panera had posted growth throughout the last few years while the U.S. economy limped along. Is Panera a fast-casual restaurant to avoid?

Panera's just-ended fourth quarter wasn't too bad. The company posted higher net income at $1.96 per share (a couple of pennies ahead of analyst estimates) and $662 million in sales -- a little under estimates but 16% higher than in the year-ago fiscal fourth quarter. Management cited poor weather conditions as a reason for strained traffic and same-store sales.

Systemwide same-store sales grew by just 1.1%. Looking ahead, the company sees 8% sales growth for the year and same-store sales growth in the range of 2%-4%.

Considering the industry headwinds and the fact that the company is devoting a good bit of cash flow to operating-level improvements, it's understandable that Panera's near-term bottom-line earnings are below estimates. More troubling is that management has already stated that the current year's first 48 days' same-store sales remain weak -- down 2.2% year over year. Sure, it's early in the year and things could reasonably swing back up, but this sets a high bar for the remaining 310 days if Panera expects to hit its aforementioned goal.

Value versus price
It is undeniable that Panera will continue to grow, considering the investments it's putting into stores (like a refreshed bakery segment), new store growth, and long-term economic trends. The problem is that at today's price, investors are paying for higher growth than the company seems to be hitting.

The 22 times earnings assumes a decent level of growth for the company. Fellow fast-casual chain Chipotle Mexican Grill trades at a much higher 34.5 times forward earnings. But this all-star has a five-year sales growth average of 20% and posted massive recent same-store sales growth of 9.3%. Panera may look cheap comparatively, but the company is not seeing near the same traffic and sales increases at the store level.

All in all, Panera is a worrisome stock at the moment. Management believes its investments will pay off in the long run, and they likely will. But investors who want in on the stock should look for a more reasonable entry point. The company's price today simply does not equate to good value.

Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill and Panera Bread. We Fools may not 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.

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