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.
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