Panera Bread - Thoughts From the Corner Booth
One of our investment management clients sent us an e-mail several days ago inquiring about our thoughts on Panera Bread Company (Nasdaq: PNRA).
We need to say at this point that investment in the retail sector is simply not our cup of tea. Certainly there may be great buying opportunities in that sector of the market, but we are picks and shovels investors, and as such, are simply not interested in the whims of the consumer when it comes to investment growth.
If Panera had a more captive audience, for instance like a Starbux, Inc. (Nasdaq: SBUX) we may have a different outlook. That's not to say that for us, Starbux is a company we would invest in, it isn't, but that is simply because the company, like Whole Foods Market, Inc. (Nasdaq: WFMI) and others, is a one trick pony and prospers only because of the discretionary generosity of the consumer. Thanks but no thanks.
Financial information related to Panera Bread Company, Inc. contained in this report, is based on the company's most recent SEC Form 10-K filing for year ending December 29, 2009, as filed with the Securities and Exchange Commission on February 26, 2010.
What They Do
Panera Bread Company along with its subsidiaries is a national bakery-cafe concept with 1,380 company-owned and franchise-operated bakery-cafe locations in 40 states and in Ontario, Canada, operating under the Panera Bread, Saint Louis Bread Company. and Paradise Bakery and Café trademark names.
The company operates in three business segments: company bakery-cafe operations, franchise operations, and fresh dough operations. For FY09 the company's bakery-cafe operations segment consisted of 585 company-owned bakery-cafes, all located in the United States, and its franchise operations segment consisted of 795 franchise-operated bakery-cafes, located throughout the United States and in Ontario, Canada.
Also for FY09, the company's fresh dough operations segment, which supplies fresh dough items daily to company-owned and franchise-operated bakery-cafes, consisted of 23 fresh dough facilities of which 21 were company-owned and two were franchise-operated.
The company closed recently at $85.02, with Resistance at $88.68, a 4% increase from a recent close and Support at $77.53, a 9% decline from a recent close.
The stock price is currently trending upward, with the Stochastic recently becoming overbought. Clearly the better short-term buying opportunity was back in July.
Considering the current trend, and the tight spread between Resistance and Support, we have no short-term investment interest at this time.
Long-Term (5 Year Hold) Investment
It’s hard to ignore a company that for FY09 had Free Cash Flow of $5.30 a share, a 13% year over year increase.
Coupling Free Cash Flow with Return on Invested Capital of 45%, a 9% year over year increase, a Debt to Equity Ratio of 0.04, a Current Ratio of 2.26, a Quick Ratio of 1.93, and Cash Ratio of 1.73, it’s very easy to see why the company is #99 on the Fortune list of The 100 Fastest Growing Companies.
Management has done an outstanding job keeping the company’s debt burden low. Like many companies, Panera does have a credit line available to them, but cudos to management for ending FY09 just like they ended FY08, with no outstanding debt.
Based on our preliminary review of the company’s FY09 annual financial information, we think a Reasonable Value Estimate for the stock based on a 5-year hold is in the $54-$56 range.
We note that the company is currently trading at 16 times Free Cash Flow, at 4.5 times Book Value, and 5.5 times Tangible Book Value, making investment in the company expensive.
Getting a great loaf a bread and nice cup of fresh soup is certainly something that has intrigued a great number of folks, especially of late with so much in the news about eating healthy.
While we would prefer a rare rib-eye steak with fries and a cold dark beer, there may be a pretty fair chance that we are in the minority here, especially as the start of our particular generation turns 65 this year.
Blue hair aside, we simply don’t find a bread store that sells soup and green tea, a compelling investment, and hope those so inclined to invest pay close attention to the lunch menu and the financial menu, both of which are which is subject to change without notice.
To download the free Wax Ink Raw Value Worksheet for Panera Bread, please click here.