Investors should look at valuation multiples when deciding whether to enter or exit a stock. Valuation multiples are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay.
There are various multiples available to evaluate a stock. We’re choosing the PE (price-to-earnings) ratio due to high visibility in Panera Bread’s (PNRA) earnings. The forward PE ratio is calculated by dividing the current share price with the EPS (earnings per share) forecast for the next 12 months.
Panera Bread’s PE ratio
Since the beginning of 2016, Panera Bread’s PE ratio has been trading at 29.4x–32.9x. As of April 17, 2016, it was trading at 30.9x. Panera Bread’s peers such as Chipotle Mexican Grill (CMG), Shake Shack (SHAK), and Brinker International (EAT) are trading at PE ratios of 53.9x, 94.1x, and 12.1x.
In the above graph, we can see that Panera Bread’s forward PE ratio moved in tandem with its share price. More than 200 restaurants will be converted to Panera 2.0 in 2016. The company also announced its expansion into catering services. This increased investors’ confidence. Now, investors are ready to pay more with the expectation of higher returns in the future.
Risks and uncertainties
The implementation of Panera 2.0 is expected to boost same-store sales growth. However, it increases expenses. This puts pressure on the company’s margins. Management stated that the expenses due to the implementation of Panera 2.0 tend to decline in the later part of 2016. This might have been factored into the EPS estimate of $6.5 for 2016. This represents growth of 3.3% from the EPS in 2015. If the company’s results come in lower, the stock could face selling pressure. That could bring the PE ratio down and vice versa.
In the last part of this series, we’ll look at analysts’ recommendations for Panera Bread before its 1Q16 earnings. It forms 0.31% of SPDR S&P MIDCAP 400 ETF (MDY).