Shares of Panera Bread Co (NASDAQ:PNRA) were temporarily halted Monday on reports that the company could be acquired. PNRA stock quickly gained traction, racing higher by about 10% after the news was released.
Early reactions are positive, but is it realistic?
Speculation has suggested that Starbucks Corporation (NASDAQ:SBUX) or McDonald’s Corporation (NYSE:MCD) would be the most likely buyers. While the news is still fresh, speculation seems to be leaning more toward SBUX than MCD, though.
With Monday’s rally, Panera stock is already up 40% on the year, putting it near $285 per share — or a market capitalization of $6.7 billion. That could make for a rather expensive takeout for either company; neither SBUX or MCD has a plethora of cash sitting in the bank.
But that doesn’t mean these titans couldn’t afford the deal. With respective market caps of $85 billion and $106 billion, surely either could acquire Panera in the $7 billion to $8 billion range.
Given Panera’s valuation, though, is it a good deal?
PNRA stock trades at nearly 32 times forward earnings. That wouldn’t be cheap, but it would give both Starbucks and McDonald’s an instant boost to EPS and a source of sales growth. Current expectations call for Panera to grow revenues 5.8% this year and 8.3% next year, alongside 14% EPS growth in 2017 and 17.6% growth in 2018. Five-year estimates call for 15.6% EPS growth.
Who Should Buy Panera?
McDonald’s could use a shot in the arm, along with a larger presence in natural and organic foods. However, this seems like an unlikely move, given that this is the same company that parted ways with high-growth, natural and organic company Chipotle Mexican Grill, Inc. (NYSE:CMG).
While Panera could work out well for MCD, SBUX seems like the better fit.
After long dominating as a coffee chain, Starbucks has increasingly leaned on food to drive sales and comp-store sales results. Recently, the company has started looking for more natural offerings for its customers — something Panera does quite well.
Similarly, while some enjoy Panera’s coffee, it’s not exactly the brand’s strongest product. This creates synergies. Starbucks could lean on PNRA for its food expertise and supply chain, while Panera could benefit from using SBUX coffee.
Other similarities like mobile ordering also stand out.
Panera already operates 626 locations (as of year-end 2016) and does so in a profitable manner. The tie-up would have hiccups, of course, but one would have to imagine there could be quite a bit of synergies too.
Although Howard Schultz is stepping down as CEO today, a position as executive chairman could actually be a good thing. He would have time to focus on merging SBUX and PNRA and maximizing those synergies. He could also focus on Starbucks’ high-end Roastery business.
Why Buy PNRA Stock Now?
The valuation is certainly questionable — again, 32 times next year’s earnings is not cheap — but its growth is undeniable. While Starbucks reiterated its plan for five years of double-digit sales and earnings growth in December, this would surely help create additional growth.
Coming into 2017, Panera stock was only up 27% over the previous five years. That’s not very impressive given the bull run we’ve seen. But the company also suffered from big throughput issues … or efficiently handling customer orders during peak traffic hours.
Panera CEO Ron Shaich referred to this as a “mosh pit” within the store. This and other solutions led to Panera 2.0. Now that the company has made the necessary transition over the past few years, shares have been rapidly climbing higher.
So for SBUX, why buy Panera stock when the company was struggling? Instead, it would have made more sense to wait it out and make sure the company could sort out its issues.
Clearly, Panera has done just that.
Additionally, SBUX is suffering from similar “mosh pit” issues being caused by Mobile Order and Pay in its high-traffic stores. Perhaps PNRA’s expertise could help. In either regard, management’s focus would be over the long-term.
A tie-up, while far from a guarantee, could pave the way for long-term earnings growth down the line.
As of this writing, Brett Kenwell did not hold a position in any of the aforementioned securities.