Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.
Tasty food, not-so-tasty stock
Every time I've eaten at Panera, I've enjoyed the experience. However, that doesn't necessarily make it a great stock idea.
Furthermore, when it comes to a higher-end crowd that might be on the lookout for coffee and pastries, Panera competes with companies like Starbucks
Of course, Panera's menu items aren't dirt cheap or high-end. I have a feeling the Panera experience rests in a middle-of-the-road, out-of-the-way niche that increasingly money-conscious consumers might simply … forget.
Meanwhile, even though investors seemed to enjoy Panera's most recent quarterly results, my Foolish colleague Kristin Graham pointed out that most of that performance was due to menu price increases. Transactions were actually down 3%, signaling declining customer traffic. I can't imagine that trend hasn't continued in the fourth quarter, or that 2009 will see much of an uptick in traffic given the economic headwinds, which have gotten worse and worse.
Over the past 12 months, Panera's stock price has surged more than 30%. However, when you look at the company's financial data over the same timeframe, it's hard to imagine why investors have been so incredibly optimistic about this particular stock.
Granted, over the past 12 months, Panera's revenue has grown 24.3%, and that is impressive. However, over the same period, Panera's earnings have grown only 2%. Think about the fact that it's trading at 26 times trailing earnings, and you see there's a major disconnect.
Analysts seem to expect Panera to report a 22% increase in earnings for all of 2008, meaning it would have to pull off a tremendous fourth quarter. That sounds like a major hurdle to jump given how bad the fourth quarter was for so many companies. With the exception of a few outliers like Wal-Mart
Meanwhile, if you look at Panera's annual data for the last several years running, you'll see a slowing growth trend even before the recession began. 2005 was a great year for Panera -- revenue increased 33.6%, gross profit was 36.8%, and earnings surged 35.3%. However, growth has been consistently slowing. Fast-forward to the end of 2007 and you find revenue increased 28.7%, gross profit was 32.4%, and its earnings decreased by 2.4%.
This stock might get stale
Panera will have to deliver some awfully high growth to justify its current high multiples, and that may make it one of those doomed stocks you should avoid. Even in good times, any whiff of disappointment can send such pricey stocks crashing, and given the current ugly times, I'd say Panera will probably be a big disappointment in 2009. I simply don't think it can pull it off.
What do you think, though? If you agree with me -- that Panera is going to be the Worst Stock for 2009 -- go to Motley Fool CAPS and rate it an "underperform." We will reveal Foolish readers' prediction for the Worst Stock for 2009 next week.
Enjoy Panera's fresh-baked bread -- but save your other kind of dough and seek out another stock for 2009.
Chipotle has been recommended by both Motley Fool Hidden Gems and Motley Fool Rule Breakers. Wal-Mart Stores and Starbucks are Motley Fool Inside Value picks. Starbucks is also a Motley Fool Stock Advisor selection. The Fool owns shares of Starbucks and Chipotle. Try any of our Foolish newsletters today, free for 30 days.