Will Earnings Push Panera to $200?

by Alyssa Oursler | July 23, 2013 9:55 am

Fast casual powerhouse Panera Bread (PNRA[1]) seemed ready to break through to the $200 mark back in late May, but was unable to break through and has been toying with $190 ever since. However, after the bell tomorrow, the restaurant chain will report earnings, providing a potential catalyst to the big, round mark and a new all-time high.

Right?

Well, if the rest of the restaurant world is any indication, I wouldn’t hold your breath.

While restaurant stocks were off to a roaring start in 2013, disappointing second-quarter earnings from fast-food king McDonald’s (MCD[2]) led to heavy selling yesterday. Meanwhile, even up-and-comer Chuy’s Holdings (CHUY[3]) — which burst onto the scene last summer and has soared for most of 2013 — has struggled of late after suffering a few analyst downgrades.

The tone for restaurant stocks is dour, as CNBC notes[4]:

“After investors feasted on restaurant stocks this year, analysts are advocating cutting back. With the restaurant stocks having run up sharply, sluggish sales make the group a difficult one to invest in from here.”

Of course, sales aren’t necessarily sluggish for Panera. The company’s streak of quarterly earnings and revenue improvements is into double digits, including respective gains of 17% and 13% in the most recent quarter.

But with a growth pick like PNRA, sluggish is a relative term. That Q1 growth, while impressive on its face, still missed estimates on both fronts — earnings by a penny per share and revenues by $5 million. The stock subsequently took a 6% after-hours dive on high volume, and kept falling in days after.

But what’s interesting is what happened next. Perhaps the bargain got investors’ stomachs rumbling for Panera again, because PNRA recovered and then some, hitting the aforementioned all-time high just under $195 in late May before its quick June swoon and recovery.

pnRA Will Earnings Push Panera to $200?

The good news: For the chart-lovers out there, that has created a classic cup-and-handle formation. Panera fell from all-time highs, then gained back some ground to form the cup. Since then, it has been drifting lower on occasionally light volume, making the handle.

So, if the stock can get an earnings boost and break through $192 (the stock’s recent high on the right side of the cup) and $195 (the stock’s all-time high and thus another point of resistance) on high volume, hitting $200 seems more than possible … even despite sector headwinds.

Analysts are expecting $1.77 per share this quarter — a penny less than they were expecting three months ago, but still within Panera’s own range of $1.74 to $1.78.

Estimates remain a bit high for the full-year, though. Although they’ve dropped slightly to $7.05, that’s still a nickel above the high end of the company’s range. So even if Panera reiterates its full-year guidance, that might not be enough to excite investors and spur a breakout.

There’s also the valuation to consider. Panera has been an appealing stock for growth-hungry investors, but that growth is gradually slowing. Panera’s expected five-year growth of 18% is hardly anything to sneeze at, but it’s significantly less than the nearly 30% annualized growth of the past five years that has been justifying its price-to-earnings ratio of 32.

A similar case of slowing but still solid growth pounded rival fast-casual momentum stock Chipotle (CMG[5]) last year. CMG’s price took a giant tumble in 2012, taking the stock’s P/E (based on that year’s earnings) with it, from 50 all the way down to 27 at one point. (Note: Since then, CMG has regained most of the lost ground.)

Still, if you take next year’s full-year EPS estimate of $8.17 for Panera, along with the aforementioned 18% growth, you get a fair value under $150. That’s 25% less than the $200 many investors are gunning for … and a possible sign that Panera could suffer a similar slide.

However, if you use the current P/E of 32 and next year’s EPS estimates, you instead get price of roughly $260.

With that in mind, even if the stock becomes less frothy — let’s say it dips to a P/E of 25 — $200 is entirely doable … though maybe not in the near-term if a shift in valuation does take place.

In the end, Panera will likely need to blow away estimates — and prove its high-growth premium is worth it — to break through resistance this week.

As of this writing, Alyssa Oursler was long MCD.

Endnotes:
  1. PNRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PNRA
  2. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  3. CHUY: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHUY
  4. as CNBC notes: http://www.cnbc.com/id/100896770
  5. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG

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