Buy Panera Bread On Dips

| About: Panera Bread (PNRA)

Panera Bread Company (NASDAQ:PNRA) has had an impressive run in the last three months, with the stock price increasing by 17%. The company owns and franchises bakery-cafes in North America. The stock is trading near it 52-week high, and the valuations are not cheap anymore due to its impressive run. We advise investors to buy PNRA on a dip and hold the stock for the long run, given share repurchases and North American expansion.

Q2 performance:

PNRA had beaten analyst estimates for earnings and revenues in Q2 2012. This came at a time when peers like Chipotle (NYSE:CMG) had missed revenues and issued weak guidance, and there were concerns regarding lower traffic. EPS surprise was 4.9% or $0.07 more than the expectations of $1.43. EPS were up 27% YoY. The company has had more than 20% earnings growth in the last 9 out of 10 quarters. Revenues were 18% more YoY, beating analyst estimates by $13 million. Bakery-café sales constitute 88% of Q2 revenues, while franchises bring in almost 5%. Same store sales rose 7.1%.

In Q2, PNRA opened 17 company bakery-cafes and 16 franchises, as compared to 13 company and 15 franchises in Q22011.


The company raised its full year EPS guidance to $5.72-$5.78, from an earlier guidance of $5.58-$5.63. This means a growth of 23%-24%, excluding the one-time legal settlement charges in fiscal year 2011. Analysts are now expecting $5.79/share.

Q3's raised EPS guidance is $1.16-1.18, while analysts expect $1.19. Q32011 EPS figure was $0.97. The Q4 raised guidance is $1.66-$1.7, as compared to expectations of $1.7. Q42011 EPS was $1.42.

The company has been rapidly expanding in the U.S. and Canada. 115-120 openings are planned for the current fiscal year, with average weekly sales at the upper end of the $40,000-$42,000 previously provided guidance range. The opportunity of tapping into the international market might not be that fruitful because the company might not be able to adapt its menu according to the tastes of some emerging economies as much as the likes of McDonald's (NYSE:MCD) have.

PNRA recently announced the approval of a new $600 million repurchase program spanning three years. The company has a market cap of $4.87 billion, which means that around 12% of the shares can be bought back under the approved program, at the current levels.

The company's fast-casual restaurants have loyal customers. According to the company's website, Panera bread scored the highest in quick-casual restaurants in research by TNS Intersearch. Competing on quality is good for companies like Panera because not only does this help them in times when discretionary spending is under pressure, but it also gives them a competitive advantage, and makes the pricing less important. The restaurant industry is under pressure due to economic uncertainty, and Panera's Co-CEO Ron Shaich recognizes this fact. He said, "We can't control the economic environment, but we can make sure we are a better alternative for consumers than our competitors."


Below is a table comparing valuation multiples of its peers, CMG, Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL), Starbucks (NASDAQ:SBUX) and MCD, in the restaurant industry:

Forward P/E





























From the table above, it can be seen that PNRA is fairly valued. CMG warrants slightly higher valuations than PNRA because of better margins and higher quarterly earnings growth (i.e. 61% vs. 23% YoY). SBUX would be a better buy at the current level, given that it has slightly higher margins, and is trading at 27% below its 52-week high. To read more about our thesis on SBUX, refer to our article.

At a forward P/E of 24x and 2013 consensus EPS estimates of $6.89, the price comes out to be $165. The mean target price is $177.

Wells Fargo initiated PNRA with a market perform rating, citing cooling-off expansion for the bakery-café chain. BMO downgraded the stock yesterday to market perform as well. Deutsche Bank, however, gives PNRA a buy rating with a $190 price target.

Though PNRA has strong financials with no debt, we recommend investors to buy PNRA on dips, as the stock seems to be fairly valued at the moment. Current premium valuations are warranted by the company's growth in the North American region. Over the long term, PNRA is a good buy, and investors should hold the stock given the company's repurchase programs, earnings growth and customer loyalty.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Retail Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.