Investors should look at valuation multiples when deciding whether to enter or exit stocks. Valuation multiples are driven by perceived growth, risk and uncertainty, and investors’ willingness to pay.
There are various multiples available for the evaluation of 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 a company’s current share price with its EPS (earnings per share) forecast for the next 12 months.
Panera’s PE multiple
Since the announcement of its 1Q16 results, Panera’s PE multiple has fallen from 31.2x to 29x. The company’s better-than-expected 1Q16 results and the rise in its management’s 2016 guidance led to a rise in its share price.
However, volatility in the broader market and concerns over a fall in PNRA’s EBIT (earnings before interest and tax) margin have made investors skeptical about the company’s future earnings. This has led to a 1.8% fall in Panera’s share price, which has pulled its PE multiple down.
As of July 18, 2016, Panera was trading at a PE multiple of 29x, while its peers Chipotle Mexican Grill (CMG), Shake Shack (SHAK), Brinker International (EAT), and The Cheesecake Factory (CAKE) were trading at PEs of 47.5x, 75.6x, 13.8x, and 18x, respectively.
Risks and uncertainties
The implementation of Panera 2.0 is expected to boost same-store sales growth. However, it will also increase the company’s expenses. This will put pressure on Panera’s margins.
The company’s management stated that expenses related to the implementation of Panera 2.0 would likely fall in the later part of 2016. This may have been factored in to the company’s EPS estimate of $6.9 for the next four quarters, representing a rise of 6.8% year-over-year.
If the company’s results are lower than this estimate, PNRA could face selling pressure. This could bring its PE ratio down, and vice versa.
In the last part of this series, we’ll look at analysts’ recommendations for Panera Bread before its 2Q16 earnings.