Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Panera Bread Co (PNRA), Starbucks Corporation (SBUX): These Specialty Eateries Are as Pricey as Their Menus

For months, Panera Bread Co (NASDAQ:PNRA) was a darling of growth investors for its soaring share price. Indeed, investors in the specialty restaurant had reason to celebrate: the stock ran up from $160 per share at the beginning of the year to over $190 per share in just a few months.

Panera Bread Co (NASDAQ:PNRA)

Unfortunately, as the saying goes, what goes up must come down, and shares of Panera Bread Co (NASDAQ:PNRA) cratered after the company released its second-quarter results. Should investors bail, or is there still reason for optimism?

A strong report on the surface

At first glance, there didn’t seem to be anything wrong in Panera Bread Co (NASDAQ:PNRA)’s report. The company reported 16% higher diluted earnings per share on the back of 11% growth in total revenues. Still, shares were as much as 7% lower on the day of the announcement.

In fact, Panera Bread Co (NASDAQ:PNRA)’s second-quarter results mirrored its first-quarter results, which saw total revenue and diluted EPS rise 13% and 17%, respectively.

Panera Bread Co (NASDAQ:PNRA) isn’t the only specialty eatery whose operating results have faced additional scrutiny in recent quarters.

Chipotle Mexican Grill, Inc. (NYSE:CMG) has seen huge volatility over the past couple years on broad skepticism over whether the company could effectively keep its costs down and still grow locations.

Fortunately for its investors, the share price has recovered strongly over the past several months, due largely to renewed success in its operations.

Chipotle Mexican Grill, Inc. (NYSE:CMG) recently released strong second-quarter and first-half results. The company’s revenues grew 18% in the first quarter and 16% in the first half, while diluted earnings per share increased 10% and 16% in the second quarter and first six months of the year, respectively.

Industry competitor Starbucks Corporation (NASDAQ:SBUX) isn’t quite an apples-to-apples competitor, selling coffee versus primarily food offerings for Panera and Chipotle Mexican Grill, Inc. (NYSE:CMG), but it is a specialty restaurant and carries a valuation profile close to both companies.

Starbucks Corporation (NASDAQ:SBUX) reported a great quarter of its own. Global same-store sales grew 8%, and when combined with effective cost cuts, profits climbed 25% year over year. Interestingly, U.S. sales showed strength, rising 9% versus the prior year. Clearly, Starbucks Corporation (NASDAQ:SBUX)’ customer base is bucking the trend of broad sales weakness seen in the domestic consumer.

Valuations remain a concern

Of these three stocks, Panera Bread Co (NASDAQ:PNRA) is the cheapest, although that’s not exactly a selling point for the stock. While Chipotle Mexican Grill, Inc. (NYSE:CMG) and Starbucks Corporation (NASDAQ:SBUX) trade for 42 and 33 times trailing earnings, respectively, Panera exchanges hands for a more reasonable 27 times trailing earnings.

Panera’s post-earnings sell-off serves as yet another reminder of what happens when investor expectations become irrational. Even strong growth isn’t good enough when expectations rise to unsustainable levels, and that’s exactly why the stock fell hard even though it reported great numbers.

Starbucks Corporation (NASDAQ:SBUX) is the only stock of the three to pay a dividend, which provides decent downside protection. At recent prices, the yield stands at 1.2%, but you shouldn’t count on any of these companies being income plays. Clearly, these stocks are counted on for strong growth, which they deliver.

That’s why it’s so hard to understand the market’s reaction in any given quarter. Strong growth is sometimes good enough and sometimes not, but that’s the gamble investors take when they pay close to 30 times earnings for large-cap stocks.

As a result, for the most part I’d recommend investors steer clear of these stocks until they trade for more reasonable multiples. However, at 25 times earnings, Panera looks interesting, and it’s getting close to that level. Chipotle Mexican Grill, Inc. (NYSE:CMG) and Starbucks Corporation (NASDAQ:SBUX), on the other hand, need to pull back significantly before I’d recommend them to my fellow Fools.

The article These Specialty Eateries Are as Pricey as Their Menus originally appeared on is written by Robert Ciura.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.