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Andrew Rand asks:

You wrote about Starbucks and mentioned Panera Bread. Have you been watching what has been happening to Panera at all? I am wondering if you think Panera could be a buy-low candidate or are they in for tough times to come with Starbucks surging ahead?

I think Panera looks good at recent prices.

PNRA shares hit $75 at the end of March 2006. They cratered to $47 by August 2006, rebounded to $68 by October 2006, went slightly lower and sideways until June of this year, then swan dove to around $40 now.

What's the problem?

Slowing revenue growth, mainly, accompanied by the explanation that competition is getting tougher as fast food restaurants like McDonald's improve their menus to offer fare comparable to Panera's.

Let's take a moment away from the office-bound analyst crowd to think about the real-life experience at Panera. Have you been to one? If you're considering investing, get thee to the nearest Panera and taste for yourself the menu competitors are trying to beat. Relax in the atmosphere that is supposedly at risk of being supplanted by nimble rivals. As you savor the food, sip the coffee, and bask in the coziness, ask yourself if you would really feel the same way at McDonald's because it has a new flavor of coffee and a fresh cinnamon roll.

I bet you'll say no.

Panera has an excellent customer experience. Their menu is superb, the kind of food you'll find yourself thinking about long after eating it. The free wireless network has kept this writer in business many a time while Starbucks charged for use of its net services. The coffee kept me warm, the food kept me nourished, and the staff at the Cherry Creek, Colorado location remembered me after just three visits or so. I liked that.

Evidently I'm not the only one who came away pleased. According to J.D. Power & Associates, Panera consistently ranks as one of the top fast-casual restaurant chains for customer satisfaction and loyalty. That's not much of a shock when you know that its menu creation crew comes from places that aren't too shabby in the food department: The Culinary Institute of America, Four Seasons Hotels, Starbucks, and Wild Oats.

Meanwhile, for all this supposed encroaching competition, Panera's earnings have improved every year since 1999. Look at the progression:

2000 0.26
2001 0.46
2002 0.73
2003 1.00
2004 1.25
2005 1.65
2006 1.84

In the past twelve months, the company posted 1.84, indicating that it's probably on track to grow earnings again this year.

Its price-to-sales ratio is only 1.4 compared to 2.3 for Starbucks. It's growing revenue at about 30%, and I expect that to edge up a bit in the next few years.

If its revenue goes up 30% in the next year and its PSR multiple gets to 2.0 -- still less than Starbucks's 2.3 -- PNRA will see $77 per share, a gain of 88% from current prices.

PNRA 1-yr chart:

PNRA 1-yr chart