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Panera's Dough May Have Risen Too Far


How hot is Panera Bread? Shares of the bakery-restaurant chain doubled in price during the past year as sales and earnings kept soaring. That much about Panera (PNRA) I knew. What I didn't know was why it was breaking away from the pack of other restaurants. Not, that is, until the other day, when I visited four Panera caf?s in and around Orlando.

My progressive lunch included a muffin top and coffee at the first spot, Vegetarian Ginger Tomato Florentine soup and a sourdough roll at the next, a Turkey Artichoke Hot Panini sandwich, with chips and lemonade, at the third, and an iced coffee at the last. Overcoming temptation, I passed on the "Flirty, Flutey Mini Bundt Cake." Each place was clean, busy, bright, friendly, and fast. Classical music played overhead; underfoot stretched hardwood floors. And the food was good. My total outlay: $15.63. Leaving a packed downtown-Orlando location, I wasn't surprised to see that a nearby office building had posted a warning: "Absolutely No Panera Parking."

As much as I like Panera's bakery-caf?s, not to mention its debt-free balance sheet, I can't suggest you hurry out to buy the stock. Bulls--and there are many, with 9 of the 11 brokerage firms that follow the stock recommending it--see Panera as another Starbucks, which is up more than 2,200% since its 1992 initial public offering. Might new investors in Panera see such gains? Yes. Is it likely? No.

The reason is simply that so much of Panera's potential is already reflected in the stock's price, recently near $70, up from $6 three years ago (chart; the shares are slated to split 2-for-1 on June 24). The Richmond Heights (Mo.) company had been called Au Bon Pain, but changed its name to Panera in May, 1999, when it sold Au Bon Pain to private investors who later sold it to Britain's Compass Group. It used the proceeds to pay off its debt and refocused on suburban rather than urban locations. From 183 units at the end of 1999, it has grown to nearly 400 in 30 states and sees almost 600 by the end of 2003, when it's set to open in Los Angeles. Panera owns 30% of the stores, and the rest are franchises. "People believe there's a very strong future here," Chief Executive Ron Shaich told me, with potential for 1,500 units.

So far, Panera stock has been driven by impressive gains in sales and earnings. Last year, the company collected revenues of $201 million, a 33% jump, and posted earnings of 91 cents a share, a gain of 75%. As time goes on, however, Panera's rate of earnings growth will slow down. This year, Panera expects earnings per share of $1.40, a 54% boost. For next year, Panera is forecasting another nice gain, to $1.96 a share. But that rate of growth, 40%, will be slower than this year's, which is slower than last year's.

Even if it's obvious, the math has an inescapable implication: Investors don't often pay higher and higher multiples of expected earnings for lower and lower rates of growth. At $70 a share, Panera goes for 50 times this year's earnings. That p-e ratio is just less than 93% of its 54% expected earnings growth rate. If that same proportion holds, investors can expect Panera at this time next year to sell for 37 times 2003 earnings, or less than $73 a share.

You can see how this phenomenon worked with another favorite restaurant stock, Krispy Kreme Doughnuts. In the fiscal year ended January, 2001, Krispy Kreme posted a 74% leap in earnings per share. In fiscal 2002, profit growth slowed to 67%. This year, it's forecast to run 40%, and next year 33%. Despite this splendid corporate performance, Krispy Kreme stock is now nearly unchanged from a year ago.

What could disprove this analysis? Panera could surprise the market with better profits than it forecasts. That's possible, of course, because "managing" nice earnings surprises is widespread. But Shaich swore to me he's not guiding Wall Street to expect lower profits than he in fact foresees. "These [estimates] are very aggressive," he said. "I would be very proud to deliver" on them. If he doesn't, watch out below. By Robert Barker


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