Panera Bread

Andrew Rand:

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.

This Weekend to Subscribers: Whether the credit crunch is something to fear or something to profit from the way we profited from the same scare back in August 1998, the deterioration in shares of Boston Scientific, and tantalizing values presenting themselves in the homebuilding sector.

Coming Soon On This Free Site: Customer responses to Power Investor President Frank Lardino, Blockbuster vs. Netflix, Pfizer, and the state of U.S. health care.

Have a great weekend!

This entry was posted in Uncategorized and tagged , . Bookmark the permalink. Both comments and trackbacks are currently closed.
  • Here are your three options:

    Option 1: Annual Subscription (no refunds)

    For just $200 per year, you’ll receive everything listed above to completely upgrade the way you manage your investments. This is 17% cheaper than the monthly option. This is what I recommend:

    Option 2:Monthly Subscription (no refunds)

    If you'd like to try The Kelly Letter  without paying the full year, you can pay $20 per month.

    Option 3:Free Email List

    If you'd like to hear more from me but aren't ready to part with any money yet, you're welcome to join my free email list:

    Join the free list

    Thank you for the work you do. You're a household name here and my wife and I often discuss your letters on Sundays. My ten- and seven-year-old children recognize your name and will eventually be taught to invest using 3Sig and 6Sig. You've had an enormously positive impact on our investing and inspired me to look at the world in more rational and clear terms than I did years ago. I'm sure that thousands of others would say the same. Kelly Letter subscriber Matt Barnes
    Matt Barnes
    Product Line Director

    Join Matt and thousands of other rational investors to invest without stress.

    Subscribe to The Kelly Letter  now!

Bestselling Financial Author