An update on Panera’s valuation
So far in this series, we’ve discussed Panera Bread’s (PNRA) comps (same-store sales) and how they affect revenue. In this part, we’ll look at how the company’s valuation PE (price-to-earnings multiple) affects Panera’s stock price.
In the above chart, you can see how Panera’s stock price has trended with the valuation driver forward PE. Panera is trading at a forward PE of 32x, which is higher than the historical three-year average of 24.7x.
Analyst estimates update
A PE higher than its historical average PE may not necessarily mean that Panera is expensive. PE is affected by a company’s growth and risk along with its return on equity. Following the company’s 2Q15 earnings on July 28, analysts revised their next-12-months EPS (earnings per share) estimates downwards to $6.40 from $6.48. This decrease in the denominator should lead to an increase in PE to 29.2x from 28.3x. A lower EPS should have led to a decline in Panera’s share price to $181.10 if the company’s PE ratio were to remain at 28.3x, but the opposite happened and shares popped to $204. On one hand, you have to take this multi-year high valuation to say that the stock is overvalued. But on the other hand, this could also mean that the market is optimistic either about the company’s future earnings relative to analyst estimates or about its future growth prospects.
This brings us to what growth rates analysts are estimating for Panera. The EPS estimate of $6.40 would mean 1.5% growth over Panera’s last-12-months EPS of $6.30. Historically, for the past five years, Panera recorded a growth rate of 13%, which may be the growth investors are pricing in to the shares. But this high valuation may concern investors if Panera 2.0 fails to deliver these expectations.
In the next part of this series, we’ll look at how this PE compares to Panera’s peers such as Starbucks (SBUX), Chipotle (CMG), and Domino’s (DPZ). SBUX, Darden (DRI), and Yum! Brands (YUM) form 4.8% of the Consumer Discretionary Select Sector SPDR Fund’s (XLY) portfolio.