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Why Panera Bread Co Slipped This Morning

By Brian D. Pacampara, CFA - Mar 26, 2014 at 10:39AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Panera Bread Co. ( PNRA ) slipped about 2% in premarket trading Wednesday after Wunderlich Securities downgraded the bakery-cafe operator from buy to hold.

So what: Along with the downgrade, analyst Robert Derrington lowered his price target to $190 (from $205), representing about 5% worth of upside to yesterday's close. While momentum traders might be attracted to Panera's share-price strength during the past six months, Derrington's call could reflect a growing sense on Wall Street that its valuation is becoming a bit stretched.

Now what: According to Wunderlich, Panera's risk/reward trade-off is pretty balanced at this point. " Derrington said:

Yesterday at its Investor Day, management detailed its "Path Forward" plan to sustain the success its iconic café has enjoyed for more than a decade. While that plan ultimately is expected to contribute to stronger SSS, margins are guided lower and EPS is more lumpy and less predictable as management suspended its 15-20% longer-term EPS guidance. Given its expected more-volatile operating performance, we prefer to take a more cautious wait-and-see approach with our investment.

Given Panera's rock-solid balance sheet and still-reasonable forward P/E in the low 20s, however, long-term Fools might want to take Wunderlich's downgrade with a big grain of salt. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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