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Panera Bread - Thoughts From the Corner Booth

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September 04, 2010 – Comments (6) | RELATED TICKERS: PNRA , SBUX , WFM

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.

Basis
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.

Short-Term Investment
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.

Valuations
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.

Final Thoughts
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.

Wax

Worksheet
To download the free Wax Ink Raw Value Worksheet for Panera Bread, please click here.

6 Comments – Post Your Own

#1) On September 04, 2010 at 5:07 PM, blesto (31.58) wrote:

"Valuations
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."

Is that what you expect them to be trading at or is that book value?

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#2) On September 05, 2010 at 6:23 AM, wax (97.14) wrote:

blesto;

We think the stock is worth $54-$56 right now, so with a recent close of $85, the stock, relative to what we believe is a fair value is vastly over priced.

We support that contention by noting that the stock is trading at 16 times Free Cash Flow, 4.5 times Book Value (which is $18.90), and 5.5 times Tangible Book Value (which is $15.52).

The stock is also trading at 21 times FY09 earnings, or 21 times trailing twelve month earnings (the PE ratio).

All of these things to us, make the stock extremely over priced, and were we in the business of recommending stocks, which we are not, we would rate this one a sell.

You may want to try opening up the worksheet (it's a PDF file). All of that information and a bunch more is shown on the worksheet.

Wax

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#3) On September 05, 2010 at 12:35 PM, blesto (31.58) wrote:

Yep.

Extremely over priced, but they do make great sandwiches.  As a matter of fact, this has made me so hungry, I'm gonna go grab one now.

A sandwich not the stock that is. :-)

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#4) On September 05, 2010 at 2:38 PM, GrowthnValue (< 20) wrote:

No thoughts on the company, just on the place.

My wife loves Panera (and so does apparently everybody else), but my excitement about it as a customer has waned.  First, there is the crowd.  Having small kids I am starting to balk at the line, squeezing through to get high chairs and everyone's food.  Admittedly, not everyone has this concern.  My other thing is the food.  The sandwhiches have been hit or miss for me lately.  Sometimes coming with hardly any meat.  Probably caused by the lines.  Given the above, I'd prefer to go to the Corner Bakery or maybe even Au Bon Pain these days.

 

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#5) On September 06, 2010 at 7:03 AM, wax (97.14) wrote:

Can't speak to the Corney Bakery but Au Bon Pain and Panera Bread are the same place.

As to the lack of ingredients, well sometimes a loud complaint is good for the soul, and the stomach.

Wax

 

From Their Website

The Panera Bread® legacy began in 1981 as Au Bon Pain Co., Inc.

Founded by Louis Kane and Ron Shaich, the company prospered along the east coast of the United States and internationally throughout the 1980s and 1990s and became the dominant operator within the bakery-cafe category.

In 1993, Au Bon Pain Co., Inc. purchased Saint Louis Bread Company®, a chain of 20 bakery-cafes located in the St. Louis area.

The company then managed a comprehensive re-staging of Saint Louis Bread Co. Between 1993 and 1997 average unit volumes increased by 75%. Ultimately the concept's name was changed to Panera Bread.

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#6) On September 07, 2010 at 9:37 AM, JaysRage (89.30) wrote:

Panera is a great business.   In case you haven't noticed, the captive audience is every single female that I know.    Bread is a high margin business.   Make it for pennies....sell it for dollars.   I ABSOLUTELY LOVE the business model.    I have only once seen it at what I would consider proper valuation.    I also generally agree that the valuation is way out of whack....but what do I know....they keep growing.    I'd be a little more generous with valuation and give them 60-65, but there is still a high premium. 

For those that are less picky about valuation than I am, I would not turn them away from Panera in the 70s.   They company is good.   Eventually, the company will probably catch up with the stock price.....

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