Does Panera Deserve A Starbucks Multiple?

| About: Panera Bread (PNRA)
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Summary

Panera's stock has gained momentum from problems at Chipotle.

That momentum has not translated into dramatic improvements in results.

See how it deploys the cash it raised last year before considering a move.

The recent problems at Chipotle (NYSE:CMG) were pounced on by Panera Bread (NASDAQ:PNRA) in a new ad campaign that emphasizes the healthy, "real" aspect of its soups and sandwich offerings.

This has made Panera a hot stock. Since making a low in mid-November, the shares are up more than 20%, while those of Chipotle are down a like amount. It would seem, on the surface, Chipotle's mojo has moved to Panera.

But has it? I don't think so.

Panera is due to report earnings on April 26, with analysts hoping for $1.50/share in earnings of $674 million in revenue. That would actually be down from the $1.74/share in earnings on $691 million in revenue achieved in the last quarter. Panera's margins are nothing to get excited about, with net income representing just 6.4% of revenue, a figure in line with those achieved in previous quarters. We're also not talking about a fast-growing company. Panera had sales of $672 million in the last quarter of 2014, and is going to see comparisons this quarter to $648 million in sales for the same quarter a year ago.

Even during its disastrous fourth quarter of 2015, Chipotle's comparable figures were not that bad. It managed to bring 6.8% of its $997 million in sales to its bottom line. It did not report a loss. Analysts are expecting a loss for the coming quarter, $1.05 per share on $874 million in revenue, and if it can even break even, they may pile back into the stock.

Panera, on the other hand, isn't going anywhere. What it has achieved, with its latest ad campaign emphasizing soups and small sandwiches, is to get out of Starbucks' (NASDAQ:SBUX) shadow just a little bit. Panera was originally called St. Louis Bread, and was a coffee-and-pastry fast-casual alternative to Starbucks for years. Now, it seems, it's a more-investable version of sandwich chains like Jimmy John's, Subway, and Firehouse Subs, all of which are privately-run franchises.

That's nice, but to me it's not a compelling investment case. Panera, right now, is like its half-sandwiches, overpriced for what you get, selling healthy when they really mean small, and offering market momentum when they really mean slow growth.

Based on its actual performance, I would expect Panera to sell at a Price/Earnings multiple of about 25, which would take it down to 150. But that doesn't mean the stock is about to fall off a cliff. Instead, I expect a slow bleed while the company tries to find growth strategies that mesh with its present valuation. The company quadrupled its debt last year so it could mull those strategies, and is sitting on $240 million in cash while it contemplates its next move.

Evaluate that move before you consider jumping on the Panera bandwagon.

Disclosure: I am/we are long SBUX.

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.