) is another overpriced, quick-casual dining concept. At $187,
based on consensus EPS for this year and next year of $7.04 and
$8.14 respectively, a 4.2% risk-free rate (30-year Treasury bond at
3.6% and .6% addition to counter the Fed's quantitative easing),
and a 7% risk premium, the stock discounts a 22% five-year compound
average annual EPS growth rate. The almost always
way-too-optimistic sell-side average growth estimate is 19%.
These sorts of overvaluation numbers have been par for the course
for many restaurant companies over the past year or more. Indeed,
even after I
said in February 2012
) was worth $236, and the stock fell from $387 to $238, making me
think investors might have come to their senses, the stock is back
up in the same range, now with about a six-percentage-point
difference between the implied growth rate and that of the
sell-side consensus. The difference for Panera now is that it seems
there is a catalyst coming to drag the stock down.
While not a catalyst, the company has benefited from having the
stock market closed to new capital raising since the 2008
recession, while financial pressure on consumers has made
quick-casual into the big growth area of the restaurant business.
At the same time, it would seem that these valuations and the
performance of the
Noodles & Co.
) IPO might have opened floodgates for the plethora of new
competitors that one would normally expect. My experience as a
restaurant analyst and some perusal of quick-casual concepts in
Dallas with my daughter, a former chain-restaurant marketing
manager, lead me to believe that Panera's prices are too high by
about $0.75 per sandwich.
So, what have I seen in the shorter term? Well, management guidance
for 2013 has been for 17-19% EPS growth. Given the already
substantial size of the company, would there be any reason to
expect it to raise or beat guidance in any of the next few years to
accelerate to the 24-26% range, which would be required to allow
for a 22% five year growth rate from here? That
be possible if there were a major economic recovery and there were
three years of 4-7% increases in real GDP. Fat chance of that now.
I would also argue that a bigger countervailing trend would be the
increases in competition from new entrants that would certainly get
plenty of financing in any such GDP growth scenario. The
implication I take from this guidance is that the company's
underlying growth rate is probably around 18% with a five-year
compound average growth rate of probably 16% as it slowly winds
down. An 18% growth rate implies a $159 price, down 16%. If a 16%
growth rate is expected, look for $146, down 22%.
There were some questions at the end of the first quarter about
comps while traffic growth was slowing, even though sales at newly
opened units were strong. This could be an early sign of too-high
prices beginning to hit home. Whether or not it is, prediction for
second-quarter GDP growth have been generally cut to below 1% --
not a good sign for restaurant sales especially. Higher interest
rates mean less mortgage refinancing-derived incremental
My thinking is that Panera Bread's valuation is closer to coming
back down to earth than others in the restaurant space, even if the
second quarter EPS number is at street expectations.