Has Panera Bit Off More Than It Can Chew?

| About: Panera Bread (PNRA)

In light of the recent crash in Chipotle (NYSE:CMG) stock, down 40% off its recent highs, I thought it was time to revisit Panera (NASDAQ:PNRA) because the recent stratospheric rise in the stock has taken it to Chipotle-like valuation.

I recommended Panera a year ago when it was trading at $110, one of my better ones, as the stock closed October 18, 2012 at $169.54. Nothing has changed much for Panera in the last year, except for the valuation, which is the problem.

Traffic Checks at Panera

From my own checks, admittedly limited to my local area, traffic has not fallen off, and if anything, has continued to grow. As the economy has picked up, more customers jam into the stores at the busiest time, around lunch. It is very difficult to get a seat at Panera if you arrive between 12 and 1 at the restaurants I frequent.

The restaurants seem to be able to maintain pricing power, as the cost of pastries and sandwiches continue to increase much faster than at other competitors. There are rarely specials, and none of the dollar or value menu pushes that McDonald's or Burger King are running. Looking up at the menu board, the cheapest lunch item is $4.99, and hits a high of $8.79. Add a drink and an $11 meal is easily within reach. The company does offer a loyalty program called MyPanera, which gives frequent customers occasional discounts such as free bagels or beverages, which may make a slight dent in the average meal cost.

Analyst Estimates at Panera

From Yahoo! Finance, the 24 analysts estimate earnings per share for the quarter ended September 30, 2012 at an average of $1.22 spread over a narrow range. Last year's comp EPS was $0.97 and last quarter's EPS was $1.50, so this number seems pretty attainable. I wouldn't think there is much chance of a miss.

Despite the likely earnings beat, there is plenty to be concerned about when Panera reports earnings for the quarter, scheduled for October 23. The stock currently runs a P/E of 32.74, and a forward P/E of 24.57. Compare that to Chipotle's 39.33 and 25.74 before the 15% decline in CMG on October 19, after a disappointing earnings and same stores sales report.

Panera's valuation is clearly rich. The company stock pays no dividend. In order to increase that valuation, it needs to grow, and that kind of growth is suspect. The company opened 29 net new cafes in the June quarter, a 1.8% increase, and same store sales increased 5.9%. As the law of large numbers kicks in, Panera is going to find it difficult, if not impossible, to maintain growth rates at the level necessary to maintain that lofty valuation. The parallels with Chipotle are almost too close. CMG fell precipitously with very similar same store sales numbers.

As with any high PE stock, valuation is never a good reason to sell or short. What is high can always go higher, unless there is a catalyst to cause the momentum crowd to flee. The time for that catalyst may be the upcoming earnings report. It makes sense to wait out this earnings report and see what happens to the stock, rather than buy in anticipation.

Recommendation: Hold or pare back if you have any gains, and wait for a pullback after earnings.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.