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Panera Bread - Thoughts From the Corner Booth

September 04, 2010 | About:
wax

wax

Author's Website
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One of our investment management clients sent us an e-mail several days ago inquiring about our thoughts on Panera Bread Company (Nasdaq: PNRA).

We need to say at this point that investment in the retail sector is simply not our cup of tea. Certainly there may be great buying opportunities in that sector of the market, but we are picks and shovels investors, and as such, are simply not interested in the whims of the consumer when it comes to investment growth.

If Panera had a more captive audience, for instance like a Starbux, Inc. (Nasdaq: SBUX) we may have a different outlook. That's not to say that for us, Starbux is a company we would invest in, it isn't, but that is simply because the company, like Whole Foods Market, Inc. (Nasdaq: WFMI) and others, is a one trick pony and prospers only because of the discretionary generosity of the consumer. Thanks but no thanks.

Basis

Financial information related to Panera Bread Company, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for year ending December 29, 2009, as filed with the Securities and Exchange Commission on February 26, 2010.

What They Do

Panera Bread Company along with its subsidiaries is a national bakery-cafe concept with 1,380 company-owned and franchise-operated bakery-cafe locations in 40 states and in Ontario, Canada, operating under the Panera Bread, Saint Louis Bread Company. and Paradise Bakery and Café trademark names.

The company operates in three business segments: company bakery-cafe operations, franchise operations, and fresh dough operations. For FY09 the company's bakery-cafe operations segment consisted of 585 company-owned bakery-cafes, all located in the United States, and its franchise operations segment consisted of 795 franchise-operated bakery-cafes, located throughout the United States and in Ontario, Canada.

Also for FY09, the company's fresh dough operations segment, which supplies fresh dough items daily to company-owned and franchise-operated bakery-cafes, consisted of 23 fresh dough facilities of which 21 were company-owned and two were franchise-operated.

Short-Term Investment

The company closed recently at $85.02, with Resistance at $88.68, a 4% increase from a recent close and Support at $77.53, a 9% decline from a recent close.

The stock price is currently trending upward, with the Stochastic recently becoming overbought. Clearly the better short-term buying opportunity was back in July.

Considering the current trend, and the tight spread between Resistance and Support, we have no short-term investment interest at this time.

Long-Term (5 Year Hold) Investment

It’s hard to ignore a company that for FY09 had Free Cash Flow of $5.30 a share, a 13% year over year increase.

Coupling Free Cash Flow with Return on Invested Capital of 45%, a 9% year over year increase, a Debt to Equity Ratio of 0.04, a Current Ratio of 2.26, a Quick Ratio of 1.93, and Cash Ratio of 1.73, it’s very easy to see why the company is #99 on the Fortune list of The 100 Fastest Growing Companies.

Management has done an outstanding job keeping the company’s debt burden low. Like many companies, Panera does have a credit line available to them, but cudos to management for ending FY09 just like they ended FY08, with no outstanding debt.

Valuations

Based on our preliminary review of the company’s FY09 annual financial information, we think a Reasonable Value Estimate for the stock based on a 5-year hold is in the $54-$56 range.

We note that the company is currently trading at 16 times Free Cash Flow, at 4.5 times Book Value, and 5.5 times Tangible Book Value, making investment in the company expensive.

Final Thoughts

Getting a great loaf a bread and nice cup of fresh soup is certainly something that has intrigued a great number of folks, especially of late with so much in the news about eating healthy.

While we would prefer a rare rib-eye steak with fries and a cold dark beer, there may be a pretty fair chance that we are in the minority here, especially as the start of our particular generation turns 65 this year.

Blue hair aside, we simply don’t find a bread store that sells soup and green tea, a compelling investment, and hope those so inclined to invest pay close attention to the lunch menu and the financial menu, both of which are which is subject to change without notice.

Wax

Worksheet

To download the free Wax Ink Raw Value Worksheet for Panera Bread, please click here.

About the author:

wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

Visit wax's Website


Rating: 2.4/5 (7 votes)

Comments

paulwitt
Paulwitt - 3 years ago
I bought Denny's (DENN) on a whim.....maybe I'm trying to subconsciously diversify my energy and

financial portfolio....,,,,yikes!

paulwitt
Paulwitt - 3 years ago
I forgot to add I also bought shares of Biglari Holdings (BH) which owns mostly restaurants.

Sardar Biglari runs it and I believe he is a value investor, maybe a Warren Buffett type investor.

His annual reports are a decent read.......

Note: Low cost operators do have one type of moat.......

wax
Wax - 3 years ago
Paul;

Certainly buying things on a whim can work out well. I know I have read on many occasions were a guy at a racetrack got a hunch and bet a bunch and walked away with a fair year's wages. The problem with that of course is you have to gamble to win, something we aren't real keen on doing.

As to Denny's, Inc. (Nasdaq: DENN), some of the issues to us about the stock are that FY09 Book Value and Tangible Book Value are both negative, and based on a recent close of $2.91, the stock is trading at almost 3 times Free Cash Flow. We think based on a 5-year hold, the stock is worth between $10.50-$13.00.

Biglari Holdings, Inc. (NYSE: BH) is a different story. Simply put, Mr. Biglari is more impressed with himself and his company than we are, as reflected by a recent $317 price. The stock is currently trading at 1.5 times FY09 Book Value, 1.6 times FY09 Tangible Book Value, and 6 times FY09 Free Cash Flow, and we admit that given those numbers, it is hard to make the argument that the stock is over valued.

But we think that a fair value for the stock is between $128-$135, assuming a 5-year hold. And since the stock is currently trading at roughly 2.5 times our fair value estimate, all we can say is best of luck with this stock, we sincerely hope it performs for your portfolio the way that you intend.

Wax
paulwitt
Paulwitt - 3 years ago
Thanks Wax for your thoughts. I appreciate hearing both sides so I can make better decisions.

Paul

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