Valuation multiples, which are driven by perceived growth, risk and uncertainties, and investors’ willingness to pay for a stock, help investors in making investment decisions.
Of the various valuation multiples available, we’ve opted for the forward PE (price-to-earnings) multiple due to the high visibility of Panera Bread’s (PNRA) earnings. Forward PE multiples are calculated by dividing a company’s current stock price by its estimated earnings in the next four quarters.
Panera’s PE multiple
On April 5, 2017, JAB Holdings had offered to buy Panera Bread for $7.5 billion. JAB has agreed to pay $315 per share. This offer along with better-than-expected 4Q16 earnings and an optimistic 2017 outlook has increased investor confidence, leading to a rise in Panera’s stock price and its PE multiple. As of April 18, 2017, Panera was trading at a PE multiple of 38.9x compared to 27.4x before the announcement of its 4Q16 earnings.
To enhance customer experience, Panera has been focusing on expanding Panera 2.0 to more restaurants. Also, it’s extending delivery services to more restaurants to increase its same-store sales growth. These initiatives are expected to increase Panera’s expenses. If the initiatives fail to generate expected sales, then the increased expenses could put pressure on Panera’s margins and lead to a fall in earnings.
For the next four quarters, analysts are expecting Panera’s EPS to grow 14.4%, which could factor into Panera’s current stock price. If the company’s earnings come in lower, the stock could face selling pressure. That pressure could cause its PE multiple to fall, and vice versa.
You can mitigate these company-specific risks by investing in the iShares US Consumer Services (IYC). IYC invests 11.6% of its holdings in restaurants and travel companies.
Next, we’ll look at what analysts recommend for Panera ahead of its 1Q17 earnings.