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Panera Rising

10/27/11 09:26:41 AM
by Billy Williams

The market isn't the only thing rising. So is this Missouri-based company that is exploding higher into a new bull run.

Security:   PNRA
Position:   Buy

The market isn't the only that's rising; so is Panera Bread Co. (PNRA) after a positive earnings report and future outlook resulted in an explosion in the bakery's price action and took price to new highs. For the quarter, Panera notched $0.97 in earnings per share versus the Wall Street expectation of $0.94. Revenue clocked in at $453 million, which also beat the $447 million target. Compared with last year, revenue was up 22%, diluted earnings per share (EPS) gained 29%, and company-owned comparable-store sales managed a 6% increase.

Founded in 1981 and based in St. Louis, MO, Panera owns, operates, and franchises bakery-cafes that offer fresh baked goods, sandwiches, soups, salads, custom roasted coffees, and other complementary products in the US and Canada. The company also manufactures and supplies dough and other products to company-owned and franchise-operated bakery-cafes. As of March 29, 2011, it owned and franchised 1,467 bakery-cafes under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Cafe names. See Figure 1.

FIGURE 1: PNRA. PNRA exploded higher on good news and higher trading volume. PNRA's positive fundamental and technical criteria are setting it up for a huge upward move as it reaches new all-time price highs.
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Panera's future prospects are compelling since they expect a nice boost from share buybacks and also because the company raised its full-year EPS target to a range of $4.63 to $4.65 -- a range that suggests year-over-year growth of 28%. Analysts had been estimating per-share profit of $4.58 for the full year.

In addition, Panera is growing nicely and showing that it has an experienced management team to tackle the current consumer-led recession. With return on equity of 19.90%, return on assets of 13.80%, no debt, and part of a high relative strength sector that is helping lead the current market higher, Panera shows a lot of promise.

Competing for the top spot, Chipotle (CMG) is currently the strongest-rated stock in the sector according to "Investor's Business Daily," but Panera has some advantages in the marketplace that will be tough for CMG to compete with over the long term. First is that CMG is primarily an outlet for Mexican food, and thus, it runs the risk of falling out of favor.

Second, CMG's menu is much smaller than Panera's and therefore has less of a selection for today's picky consumer. While CMG serves high-quality ingredients and grills it to each customer request, the reality is that it is hard to compete with a competitor like Panera, which has equally high standards and quality of food, plus a larger and more varied menu.

In the long run, Panera is likely the most stable of the two. A change in leadership is always possible, but for now, Panera has broken to new price highs on tremendous volume, which puts it in the technical position of rising higher. Watch for price to settle in after such an explosive move and experience a minor pullback or consolidation, but then watch for the stock to trade higher and catch the move as it trends upward.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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