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Panera Bread – Back to a Tasty Valuation

June 02, 2014 | About:

Panera (PNRA): Is it cheap enough to be delicious again?

With the DJIA and S&P 500 hitting new highs, there are not many stocks trading with below-normal valuations. Getting a high-quality name at an attractive multiple in this environment usually requires acceptance of at least some negative company-specific news.

Quick serve restaurant chain Panera Bread (PNRA) has an enviable long-term growth record but suffered a rare negative year-over-year comparison ($1.55 versus $1.64) in 2014’s first quarter. Management still expects to post a 2% to 3% boost in full year EPS, to about $6.85.

This year's slower growth trend combined with a somewhat elevated P/E in 2013 led to a share price decline from almost $195 to under $150. PNRA closed on May 30, 2014, at $153.61.

Customers like the firm’s menu. EPS grew by 561% in the decade ended 2013 with 257% of that increase coming since 2006. The company sports a debt-free balance sheet and has no preferred shares or pension plan expense.

The shares outperformed 85% of Value Line’s 1,700-company main research universe over the last 10years.

Panera’s outstanding balance sheet and long-term record has been reflected in its historical valuations. The shares rarely get cheap. Even the 2008 to 2009 recession never took PNRA below 14x to 15x earnings. The company’s lowest P/Es, excluding those outlier years, typically came at 18x to 22x. There were opportunities to sell PNRA at 29 times or higher during nine of the previous 10 years.

Panera’s 10-year median multiple has been 26x.

Today’s P/E is about 22.4x the current year projection and 19.9x Panera’s 2015 estimate of $7.70 per share. That is relatively low based on historical precedent. Buyers in mid-2010 paid 21x that year’s final profits on the way to better than 150% gains over the next three years.

The only times when PNRA disappointed investors were from 2006’s pinnacle, at more than 40x earnings, and near last year’s peak at a 29.2 multiple. Value investors know better than to overpay like that.

What is PNRA worth?

Standard & Poors’ evaluation is enigmatic. They call Panera a SELL at the same time they note a 12-month target price 8.1% above last week’s close. S&P acknowledged the company’s current undervaluation and high quality. The S&P analyst expects higher 2014 and 2015 earnings per share than both Value Line and Zacks are now projecting.

The $166 goal price assumes a less than average 22.2 P/E based on their current year estimate and is just 20.2x S&P’s 2015 number. Those are not aggressive targets compared with PNRA’s previous trading history.

Researchers at Morningstar are substantially more bullish.

They rate PNRA as a four star (out of five) BUY and see fair value as $178, about 16.1% above the current quote. They are looking for $8.12 in 2015 EPS. If that outlook proves accurate PNRA’s reaccelerating profits and historically moderate P/E might lead to a realistic year-end 2015 goal of about $195 to $200.

Those levels do not seem unreasonable at all. Traders paid almost $195 for PNRA in late 2013. Panera has touched a high of $193.20 so far in 2014.

Seeking an even larger margin of safety?

Consider selling some PNRA January 2016, $160 or $170 puts. Unless the shares gap up on Monday’s opening you should be able to get at least $23 on the lower strike price and $29 or better for the $170 puts.

Writing those put options would lower the ‘if exercised’ prices to $137 or $141 respectively while offering maximum potential gains of $2,300 or $2,900 per contract sold. Both "if put" levels are south of any actual trading price for PNRA since July of 2012.

Panera Bread is a classic GARP (growth at a reasonable price) vehicle. As with the much-beloved Costco (COST), if you wait for a super low entry point, you may never be able to establish a stake.

You’ll enjoy PNRA’s specialty salads, breakfast sandwiches and pastas much more if you take an ownership position.

Disclosure: No position at the time of writing. I may buy PNRA shares and/or sell PNRA puts this week.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 5.0/5 (3 votes)

Voters:

Comments

Dr. Paul Price
Dr. Paul Price premium member - 1 month ago

I sold some PNRA Jan. 2016 $160 and $170 puts this morning @ $23 and $29 respectively. I am now short PNRA puts.

davidchulak
Davidchulak premium member - 1 month ago

Paul,

Though I've been watching this stock, I'm curious about their plans to do what McDonald's France did by installing kiosks and getting rid of all their cashiers. The plan was...though it could have changed, was to have kiosks in all of the stores by 2015 or 2016. Have you heard any blowback on the company doing this? It will certainly save them some money, but I was curious if anyone has looked at how it will be peceived and affect the business? Good article by the way.

Dr. Paul Price
Dr. Paul Price premium member - 1 month ago

The push for kiosks is by the parent company as a cost cutting move.

Many franchisees oppose it.

It is the natural response to the push for an ever increasing wage level. When salaries and benefit costs increase margins can be negatively impacted. Those still employed make more but overall jobs can be lost.

It is the unintended (and unmeasurable) result that higer minimum wage advocates don't ever acknowledge.

barry30
Barry30 premium member - 1 month ago

dr. please explain why 2016. and why not a lower strike , as it may go down lower either with the general market or itself.i dont think we want to get it put to us.

Dr. Paul Price
Dr. Paul Price premium member - 1 month ago

Barry,

You could certainly use a shorter expiration and/or a lower strike price. Selling shorter-term puts would bring in less money though, raising your break-even point (all else being equal).

Writing lower strike price puts would decrease your break-even but at the cost of limiting your upside. The maximum profit on a shorted put is 100% of any premium received. Sell a further out of the money put and your maximum gain will be lower if the shares go up.

There is no absolute right answer on which ones will work out best unless you can see the future in advance. I recommended the strike prices and expiration dates I chose for my own account. Feel free to use any combination that suits your taste.

suresh.devanathan
Suresh.devanathan - 1 month ago

good work

SeaBud
SeaBud premium member - 1 month ago

Good article but I am not sure the historical P/E is the benchmark as this company saturates markets. They expressed a desire to open 115+/- stores in 2014. Will that rate of expansion be reasonable and profitable over the next 3-5 years (my minimum time horizon)? Just not sure as a 20+ P/E almost never attracts a buy from me (and yes, I miss opportunities).

Good company and good products. One positive and two negatives on that. They are removing additives by 2016 and tailoring menu to various diets - thus recognizing the changing eating habits of their customers (salad crowd). However, they remain a bread company in a society where bread is increasingly a health concern. Obviously, anybody who eats at McDonalds does not care about their health, but Panera must cater to its customers who pay more for quality and perceived "healthy" food. I think they need to not drive their cost so low to compete on price that they damage quality - and I think eliminating employees may make consumers look at their sandwiches/salads like a refrigerator salad at 7-eleven - just gross. They can do it but this is an issue.

Finally, the comment on minimum wage raises eliminating workers is not a simple correlation. The US economy is currently fairly stagnant and lower earners lack of capital (and historical wealth discrepancy) is to blame. Companies have plenty of capital to spend and wealthy individuals have plenty of capital to invest, but demand is low because middle class earnings have been receeding for 20+ years relative to the cost of living. I speak as the owner of multiple businesses, including a restaurant, at $7.25, the current minimum wage is a joke and should be raised (not to $15, like Seattle, but to at least $9 or $10/hour).

Dr. Paul Price
Dr. Paul Price premium member - 1 month ago

PNRA announced a $600 MM share buyback authorization after 4 PM today. That would account for about 14% of the entire float at Thursday's closing quote.

The stock was up about 2.6% after hours.

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