Will Panera (PNRA) End Up Like Chipotle (CMG)?

Panera Bread Co. (NASDAQ:PNRA) was up almost 7% today on 3Q earnings that were 4% above estimates and 27% above the same quarter last year, being driven by strong same store sales that were up 6.2% for company owned stores. On the other hand, Chipotle Mexican Grill, Inc. (NYSE:CMG) had the opposite success in its latest earnings announcement. The company saw a jump in profits, but missed estimates and noted that competition was pressuring comp sales, which came in the lowest in several years.

Both Panera and Chipotle saw their stock go gangbusters for the three years ended 2Q 2012, outpacing other fast food restaurants by offering fresh food and higher quality ingredients. Each company was up over 200% over this time, while the S&P 500 was relatively flat. However, since the end of 2Q things have gone very wrong for Chipotle. The company is now down over 15% during 3Q, while Panera is up over 20%.

David Shaw

Chipotle is in a battle with the other burrito chain Qdoba, as well as trying to hedge the consumer trade down to Yum! Brands, Inc. (NYSE:YUM)'s Taco Bell. Billionaire David Einhorn recently posted a short recommendation against Chipotle, citing that Taco Bell would soon begin to take share from the company; it appears he is correct. Taco Bell introduced its higher quality, yet value oriented, Cantina Bell menu, which has been only more bad news for Chipotle. Taco Bell parent, Yum, posted 3Q results of $0.99 versus the same period last year of $0.83. Even with weaker growth in China, the company has posted same store sales up 6%.

Starbucks Corporation (NASDAQ:SBUX) should see revenues up 12% in 2013, on the back of a 14% increase in 2012. The company has seen a number of competitors attempt to infringe on its market. After Panera's entry into the breakfast market, the company expanded its suite of breakfast items and expects same store sales to be up 6% in the Americas and 11% in China. The company is even entering the at-home segment by offering its own single-cup machine, competing head to head with Green Mountain; see if Starbucks might buy Green Mountain.

In most cases, the fast-food giant that all companies compete with is McDonald's Corporation (NYSE:MCD). The company recently introduced new menu items that should broaden its customer base. These items include new coffee and frappe items that will allow the company to further compete with Starbucks and Panera in the breakfast market. McDonald's continues to be a strong company, paying a 3.5% dividend and expects to grow next year's EPS at 10%; find out if McDonald's is a good investment.

We see McDonald's as a company worth taking a look at, but also like Panera. Panera guided 4Q earnings estimates upwards, increasing 4Q EPS expectations to $1.72 - $1.74 per share, compared to previous consensus estimates of $1.69. Chipotle on the other hand saw a recent downgrade from Wedbush, citing the fact that increased marketing will likely no longer be able to drive same store sales growth as much as in the past, whereas Panera offered strong comp guidance between 4.5% and 5.5%, above prior consensus of 4.0%.

Even with Chipotle's recent decline, the company trades at 28x earnings compared to Panera 31x. We are comfortable with Panera's premium given the company's strong growth prospects, but still question Chipotle's valuation. Notable funds were also comfortable with Panera's valuation as many were loading up on shares during 2Q. This includes AQR Capital, increasing their 1Q stake by 45%, D.E. Shaw with an increase of almost 5000%, and Israel Englander, who upped his stake 50%. Billionaire investor Jim Simons was the top fund owner by shares in both Chipotle and Panera. During 2Q, Simons upped his stake by over 50% in Chipotle, but for Panera, Simons decreased his position 4% in 2Q, on top of a 26% decrease in 1Q. For a complete look at the hedge fund activity surrounding this stocks, continue reading here.

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