This morning, Panera Bread Co (NASDAQ:PNRA) had one of those stock price charts where it appears as though the apocalypse came along, and the market just disappeared. The weak earnings report that the company released yesterday sent the shares down almost 7% overnight, after a 2% drop late in trading on Tuesday. Panera now trades at a price-to-earnings ratio of 26.7, pulling it closer to its competitors.
Actually, that’s not entirely true. Panera Bread Co (NASDAQ:PNRA)’s drop pulled it closer to companies such as Darden Restaurants, Inc. (NYSE:DRI) — operator of Red Lobster and Olive Garden — and Jack in the Box Inc. (NASDAQ:JACK), which also runs Qdoba. It fell away from what seems like its closest competitor, Starbucks Corporation (NASDAQ:SBUX). But that’s not necessarily a bad thing for investors.
The valuation game
Using P/E ratios to measure the relative cost of stocks is a tricky system, but within a sector, it does give investors a good idea of what kind of expectation is built into a stock price. In general, the more growth that we expect from a company, the higher the P/E ratio is going to be. Investors are willing to pay more now for bigger gains in the future.
With a P/E of 26.7, Panera Bread Co (NASDAQ:PNRA) is still above the restaurant average P/E of 21.7. That means people are expecting Panera to grow faster than the average company within the sector. Starbucks Corporation (NASDAQ:SBUX) is further ahead, at 34.4, while Darden Restaurants, Inc. (NYSE:DRI) sits below the average at 15.6, and Jack in the Box Inc. (NASDAQ:JACK) is right in line with Panera, at 26.3. So what does that really tell us?
What it doesn’t tell us is something intrinsic about the companies. The P/E ratio is not a measure of how good a company is, only what the market thinks about a company. The drop in Panera Bread Co (NASDAQ:PNRA)’s price indicates that the market is worried about the future prospects for rapid growth — with some good reason.
A shortfall in the second quarter
Panera Bread Co (NASDAQ:PNRA)’s earnings release contained a few bits of bad news. First, its comparable-store sales grew slower in the second quarter than expected. While it had forecast a year-over-year increase of between 4% and 5% at company-owned locations, it managed growth of only 3.8%. That led to a slowdown in revenue growth, which led to a slowdown in profit growth.
All the pulling back means that the company had to reforecast its future earnings — which had the biggest impact on the stock price — pushing annual earnings per share growth down to between 15% and 16%. Originally, the company had forecast earnings growth of between 17% and 19%, per share.
The competition and the bottom line
Getting back to the comparison to peers, Darden Restaurants, Inc. (NYSE:DRI) is looking for a drop in EPS of between 3% and 5% for its next fiscal year, because of a set of increasing costs. Moving up the chain, Jack in the Box Inc. (NASDAQ:JACK) is expecting to grow EPS by 29% and 30% on an operational basis — it only forecasts based on continuing operational income growth.
Starbucks Corporation (NASDAQ:SBUX) leads the pack in cost on a P/E basis, but the company is in the middle in terms of growth. The company is looking for between 18% and 22% annual EPS growth this year. The reason it’s still much more expensive than Panera Bread Co (NASDAQ:PNRA) is threefold.