Should I Buy Panera Bread? 3 Pros, 3 Cons

by Tom Taulli | June 6, 2012 10:59 am

The restaurant business is extremely tough — but Panera Bread (NASDAQ:PNRA[1]) makes it look easy. Every quarter, the company seems to expend little effort to deliver standout results.

And yes, Wall Street has taken notice. Over the past five years, the stock has posted an average annual return of 19%.

O.K., so should you buy Panera stock now — or has it gotten too expensive? To decide, let’s take a look at the pros and cons:

Pros

Unique Concept. Panera operates more than 1,500 locations in 42 states, including some operations in Ontario, Canada. The company is known for its handcrafted artisan bread, which is made fresh every day. There’s also a focus on healthy eating, such as antibiotic-free chicken, zero grams of artificial trans fats and all-natural ingredients. What’s more, Panera has continued to invest in new menu items. Recent examples include the Turkey Artichoke Panini and Steak Balsamic Panini.

Business Model. A majority of Panera’s locations are franchises. This has been a key benefit in terms of requiring less capital investment. It has also provided steady income streams because of the royalties.

At the same time, Panera was smart to introduce a loyalty program in 2010, which has been a driver of more customer traffic.

Strong Financials. Over the past five years, Panera has increased sales by about 70%, to $1.82 billion in 2011. During this time, net income went from $57 million $136 million.

Panera also has a rock-solid balance sheet. In all, it has $223 million in the bank and no long-term debt.

Cons

Macro Problems. Over the past few months, the U.S. economy has been slowing. While Panera has a value-based menu, it’s still vulnerable to a pullback.

Competition. Like others in the fast-casual restaurant market — such as Chipotle (NYSE:CMG[2]) — Panera has benefited substantially by offering higher-quality choices. But other restaurant chains are recognizing those benefits and are making investments to use higher-quality ingredients — see Yum! Brands‘ (NYSE:YUM[3]) new “gourmet Mexican” menu[4] — and present more inviting store formats.

Oh, and this week Panera got a new competitor: Starbucks (NASDAQ:SBUX[5]). The Seattle-based giant agreed to shell out $100 million for La Boulange[6], a local bakery retailer in San Francisco.

Valuation. Panera’s stock is trading at 28 times earnings, which is a bit frothy. If there’s even a minor earnings disappointment, the stock is likely to get hit hard.

Verdict

Panera is a great company, with a memorable brand and store concept. With strong cash flows and its franchise model, it has been able to finance its growth internally. In fact, the company may even start paying a dividend within the next couple years.

However, in the short run, Panera is likely to face blowback because of competition and the state of the economy. In light of these factors, the cons outweigh the pros on the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[7], “All About Short Selling”[8] and “All[9] About Commodities.”[10] Follow him on Twitter at @ttaulli[11] or reach him via email[12]. As of this writing, he did not own a position in any of the aforementioned securities.

Endnotes:
  1. PNRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNRA
  2. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  3. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  4. “gourmet Mexican” menu: http://investorplace.com/2012/06/taco-bell-goes-gourmet-yum-brands/
  5. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  6. $100 million for La Boulange: http://investorplace.com/2012/06/starbucks-bakes-a-brilliant-move/
  7. “The Complete M&A Handbook”: http://goo.gl/aLNDk
  8. “All About Short Selling”: http://www.amazon.com/All-About-Short-Selling/dp/0071759344/ref=sr_1_1?s=books&ie=UTF8&qid=1302184310&sr=1-1
  9. “All: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  10. About Commodities.”: http://www.amazon.com/All-About-Commodities/dp/0071769986/ref=ntt_at_ep_dpi_10
  11. @ttaulli: https://twitter.com/ttaulli
  12. email: mailto:tom@taulli.com

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