Analysts all over are saying that the fast-casual dining segment is the one to bet on within the restaurant industry: A value proposition and strong unit economics should help it outperform the broader industry. In this sector, Chipotle Mexican Grill (CMG, Financial) and Panera Bread (PNRA, Financial) are two of the companies expected to outperform their peers and deliver above-average EPS growth rates over the next few years to come. In this context, I would like to take a closer look at the latter in order to elucidate if it stands as a good investment opportunity, beyond its growth projections.
The Business
Panera Bread is a U.S. bakery-cafe chain company that operates both company-owned and franchised locations all over the country. With a market cap of 4.8 billion, this firm has plenty of room for growth, and has proven this over the past few quarters. In fact, Panera “commands pricing power, customer loyalty, upscale restaurant environments and margin-friendly menu additions has put Panera among industry leaders in sales productivity (average unit volumes of $2.4 million) and restaurant-level margins (we forecast just under 20% in 2014)” (R.J. Hottovy, Morningstar).
Unlike other restaurant chains´ growth stories, Panera´s looks promising. By offering products of higher-quality than quick-service restaurant chains, while at the same time, pricing them cheaper than at casual dining restaurants, the company seems poised to increase its market share over the next several years. Its value proposition should help it drive sales and store base expansion.
I should also highlight the importance of its supply chain to its overall business. Wide and efficient, this system assures that every one of its stores (company owned or franchised) gets fresh dough every day, and helps consistently ameliorate margins.
Finally, there is one point that is very relevant to Panera´s business model: It´s recession-proof. In fact, the company has been one of the very few in its industry that has managed to grow, even amid a tough economic environment. Going forward, the company only expects this growth to continue and even accelerate, mainly driven by several initiatives focused on improving operational efficiency, customer service and core enterprise systems. New menu launches, strong marketing initiatives and its loyalty programs should also help Panera deliver the growth that analysts expect.
Financials and Valuation
The company's third quarter results failed to meet revenue estimates and barely met EPS growth projections. Guidance for the quarters to come was also quite weak. Notwithstanding, average annual EPS growth estimates for the next five years to come indicate that Panera should deliver rates around 16% to 19%, compared to an industry average of 15% to 16%.
One of Panera’s big advantages, that should only strengthen going forward, lies in long-term franchisee agreements. Franchisees usually pay royalties of more than 5% of the gross sales from each store, providing a stable cash flow for the company.
So, although several analysts are recommending to “wait and see,” mainly due to short-term uncertainties and the recent weak results, Panera still looks like a worthy long-term investment.
Valuation looks good too: At 25.6 times the company´s earnings, the stock trades close to the industry mean and median, and at about half the valuation of Chipotle Mexican Grill (51.6 x P/E).
Another very important measure when assessing a company´s profitability and outlook is the return on equity. In this aspect, both Panera and Chipotle rate similarly. With returns on equity around 22%, they outperform the broader industry by a wider margin. In more general terms, all of Panera´s profitability, growth and financial figures look pretty encouraging.
So, it looks like a good time to trail investment gurus like Steven Cohen, John Hussman, Joel Greenblatt and Paul Tudor Jones, among others who recently added this stock to their long-term holdings. In fact, now looks like a better time to buy that when they did, as the stock price is down by an average of 3% since their purchases.
Disclosure: Damian Illia holds no position in any stocks mentioned.
