Published:
August 13, 2007
Panera Bread (Nasdaq: PNRA, $43.31) -- One of
the problems of investing in a high-flying growth stock is that
investors are not at all forgiving -- even a hint of a slowdown can
send the shares tumbling.
On the other hand, these irrational selloffs can knock such stocks
down into value territory, giving nimble investors the rare
opportunity to pick up rapidly growing companies at discounted
prices. Such is the case with fast-casual dining chain Panera Bread,
which has retreated from nearly $60 to around $40 over the past two
months.
Panera operates a chain of more than 1,000 fast-casual eateries. The
firm's popular bakery-cafe style outlets are well-known for their
pastries and baked goods -- which are made with dough delivered
fresh each morning.
Without a doubt, the fast-casual dining space is crowded. However,
there is a reason why Panera has been awarded top marks for customer
loyalty over and over again. The firm goes a step above your
standard soup and sandwich meals -- think chicken & wild rice in a
sourdough bowl or turkey & artichoke on rosemary & onion focaccia.
And aside from its fresh, healthier entrees, customers can also
relax in a quiet setting with complimentary high-speed Internet
service.
Yet, with an average ticket of just $7 to $8, customers aren't
paying much more than they would for a combo meal at their favorite
fast-food hangout. As a result, the company occupies its own growing
niche -- somewhere in between Burger King (NYSE: BKC) and Chili's
(NYSE: EAT).
The results speak for themselves: revenues have soared +33% annually
over the last five years, quadrupling from $200 million to around
$830 million. At the moment, the average Panera bakery now rakes in
weekly sales of about $38,200, which works out to about $2 million
per year -- easily outpacing most of its rivals.
The shares have come under fire in recent weeks from a very
demanding market. Much of the damage came after the company reported
an -11% drop in second-quarter earnings amid rising costs and
mediocre same-store sales growth. Worse still, the company issued a
soft outlook for the upcoming quarter.
But it seems shortsighted to erase nearly one third of the firm's
market capitalization just because costs have crept upward lately.
While we do think rising commodity prices could continue to present
a challenge, this is hardly a company-specific problem -- many
others are battling it as well. And Panera will be in a better
position than many to at least partially pass these additional input
costs on to consumers.
Meanwhile, none of this is an indication that Panera's restaurants
have lost their appeal. In fact, business already appears to be
picking back up, as same-store sales (a key metric for restaurants
and retailers) are expected to have rebounded sharply in July --
rising between +3.6% and +3.9%.
Investors should expect the firm to continue with its aggressive
expansion plans -- there is room for the store base to grow from the
current 1,100 to as many as 5,000. That is expected to help drive
the firm's earnings up +22% annually over the next five years.
Based in part on that robust outlook, we have calculated a fair
value of $61 per share -- about where the shares were trading back
in June. Now that recently lowered full-year guidance has dampened
short-term expectations, much of the risk in the shares has been
removed. And given the company's solid long-term outlook, we think
now is the time to act.
Nathan Slaughter
Editor
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Stocks
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Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
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