(NASDAQ:PNRA) 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
(NYSE:CMG) 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.
(NASDAQ:NDLS) 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 might
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 consumption dollars.
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.
No positions in stocks mentioned.
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