Will Panera Bread Rise to the Top?
May 11th 2012 10:50PM
Updated May 11th 2012 10:52PM
With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.
Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.
By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.
Buy what you know
Based on my underperform rating on Empire Resorts and Ctrip.com, as well as my outperform rating on Darden Restaurants, WMS Industries, and MGM Resorts in the broad hotel, entertainment, and leisure industry, the CAPS supercomputer thought I also might be interested in casual-dining leader Panera Bread (NAS: PNRA) , one of five Stocks of the Day it offered up for my consideration this week.
With the food-service industry expected to see only a 1% gain in traffic this year -- admittedly better than the flatline it experienced in 2011 -- let's see what Panera has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.
Panera Bread Snapshot
|Industry||Hotel, Entertainment, and Leisure|
|Market Cap||$4.6 billion|
|Revenues, TTM||$1.9 billion|
|Return on Capital, TTM||22%|
|Dividend & Yield||NA/NA|
|Free Cash Flow, TTM (OCF-CapEx)||$151 million|
|CAPS Rating (out of 5)||****|
Sources: Motley Fool CAPS, S&P Capital IQ.
Pull up a chair
Quick-serve restaurants saw only 1% unit growth at most during the last five years -- some even experienced as much as a 2% decline -- but the fast-casual segment represented by Panera and Chipotle Mexican Grill (NYS: CMG) saw no less than 4% growth in the depths of the recession and as much as an 11% increase in the number of units.
Diners have enjoyed the fresh but quickly served foods such establishments serve -- so much so that even fast-food restaurants are updating their stores to reflect this trend. The industry analysts at NPD Group say Wendy's (NYS: WEN) and Burger King are installing "lounges" in their restaurants to provide a more casual ambience, while the foods served are even getting an upgrade, with Yum! Brands' (NYS: YUM) Taco Bell unit bringing in celebrity chefs to spice up the menu.
While NPD says such growth initiatives are available to any restaurant, Panera Bread has made a science out of providing its customers with value for their money, and that was reflected in better-than-expected first-quarter results. Sales were up almost 9% from the year ago period, coming in just shy of half a billion dollars as comps jumped 7.5% and transactions grew 2%. The chain raised full-year guidance and now forecasts earnings to grow 23% to 24% from 2011, and margins will continue to expand despite rising input costs.
"Get in my belly"
Unlike some rivals, Panera has been able to pass along a lot of those costs to its customers, who apparently don't mind paying a little more for the convenience and relaxation the dining experience there conveys. The Motley Fool's Jason Moser recently said the chain is really in a unique niche all its own. Although it gives off a Starbucks (NAS: SBUX) vibe with its "kick back and relax" ambiance, the two aren't really competitors. Neither is Chipotle, with which it's often compared, because the foods are really different.
That could help explain the steady increase in the stock's value, which is up 26% over the past 12 months, yet why it's still available on the value menu. Panera's shares go for 23 times earnings estimates, versus 37 times at Chipotle and P.F. Chang's forward multiple of 28.
CAPS member getrichdietrying thinks that without a dividend Panera is too richly valued, but bafischer believes its strong management team compensates for whatever failings there might be by leading innovation in the industry: "They continue to roll out new products and are at the forefront of the fast-casual market."
Panera's shares have eased back from their highs, perhaps reflecting the worries over rising commodities costs, but I'm willing to wager it can maintain its growth prospects for some time to come and am rating it to outperform on CAPS. Add it to your Watchlist, and then take a seat at the table by letting me know on the Panera Bread CAPS page or in the comments section below whether you'll be feasting on its stock, too.
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At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Chipotle Mexican Grill, Darden Restaurants, Starbucks, Ctrip.com International, and Panera Bread. Motley Fool newsletter serviceshave recommended buying shares of Starbucks, Ctrip.com International, Yum! Brands, Panera Bread, and Chipotle Mexican Grill, writing covered calls on Starbucks, and creating a bear put spread position in Chipotle Mexican Grill. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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