Careful investors always look at valuation multiples when deciding whether to enter or exit a stock. 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 using the PE (price-to-earnings) ratio due to the high visibility of 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
The removal of artificial ingredients, aggressive marketing campaign to convey the message to its customers, the increase in the number of restaurants converted to Panera 2.0, and menu innovations are all expected to drive the company’s SSSG (same-store sales growth) for the next four quarters.
These initiatives appear to have increased investors’ confidence, leading to the rise in its PE multiple. As of January 9, 2017, Panera was trading at 27.7x, up from 26.5x on January 3, 2017. By comparison, Panera peers Chipotle Mexican Grill (CMG), Shake Shack (SHAK), and Brinker International (EAT) were trading at PE multiples of 43.8x, 64x, and 13x, respectively, on January 9, 2017.
At the beginning of 2016, the company was trading at 29.7x. However, the widening gap between the gap between the cost of eating at home and the cost of dining out previously led to a decline in its PE multiple.
With the intention of increasing its SSSG, Panera has implemented the above-mentioned initiatives. If the initiatives fail to generate expected SSSG, the rise in expenses due to the implementation of these initiatives are expected to put pressure on Panera’s margins, thus bringing its earnings down. Analysts are expecting the company to post EPS growth of 10% in next four quarters.
Panera’s current share price may have factored in this rise in EPS. If the company’s results come in lower, the stock could face selling pressures. Those pressures could cause the PE ratio to fall, and vice versa.
Remember, you can mitigate Panera’s company-specific risks by investing in the iShares US Consumer Services (IYC). IYC has 11.5% of its holdings in restaurants and travel companies.
In the next and final part of this series, we’ll look at analysts’ recommendations and price targets for Panera for the next 12 months.