PNRA: In Defense of Panera Bread (Update 7/30)

If there is one component of investing that I feel that I have mastered is restaurant and beverage names. I won't list the names and the record of my calls...let's just say that I wish that I had put more money where my mouth has been -- even as recently as a few months ago when BUD was selling around $42.

The goal, of course, is to buy great long term opportunities when they are the best prices - hopefully creating a "margin of safety" as discussed by Benjamin Graham.

Wendy's (WEN) is a fantastic company that seems to be experiencing some recent short term operating issues. Some of the negative recent news may continue to impair the stock (currently trading around $59.50; traded between $43.58 & $66.35 in the last 52 weeks) and ultimately create a good entry point. (In early 2003 I was ALL OVER my dad to buy this when it was trading near $25. Hmmm...120% return in 3.5 years? I'll take it!)

One restaurant company that may be looking extremely tasty about now is Panera Bread (PNRA, $51.53). Panera was THE hot growth story in quick-service/fast casual earlier in the decade. The stock is up 272% since June 2001, vs. 8.3% for the S&P 500, but it is currently down 30% from its recent high of $75. IMHO, the growth story on Panera is nowhere close to complete.

I found this interview in Fortune that I thought was interesting and insightful. I think that Panera actually has two strategic operations for revenue growth: (1) expansion of # of restaurants, and (2) $ volume being pumped through each restaurant.

(1) Panera currently has 300+ company-owned cafés and almost 600 franchised stores. But, IMHO the concept has a lot of room to run. The CEO says:

Is it going to be 2,000, 3,000, 4,000? I don't answer that question, because it doesn't matter to me. What I know is that I have enough real estate and demand to support the 17% growth we're committed to for the next three to five years. And we're on record with a target of 30% [profit growth] this year.

(2) Panera currently excels in only 2 day parts, with dinner being a huge hole in the concepts operations. 20% of PNRA's business comes after 5pm. The company is just now rolling out the first of a wave of products for the evening. "We are doing a product called Crispani, it's a pizza-like product made from our fresh dough, organic Muir tomatoes, Neiman Ranch pork sausage."

If you give people food they want, in an environment that they want, they will spend a dollar or two more, they will go out of the way for it. When we first started we were offering a lunch solution rooted in soup, salad, and a sandwich, and we were doing $1 million a unit. Today we are doing $2 million a unit and offering four consumer solutions - lunch, breakfast, a gathering-place solution, and a take-home solution.

This blog entry from Seeking Alpha makes a quick case for Panera, which I see as a safe long term bet at these levels.

So now it's up to investors to place their bets on whether or not Crispani will turn out to be good for Panera, or cause its demise. My guess is that it won't cause the bakery-cafe's demise, given the history of successful product rollouts and America's infatuation with pizza.


And oh, by the way, there are more menu innovations coming but the company won't say what. But Panera might not earn the $2/share like managment originally said would happen. Would you be disappointed if they only earned $1.90, instead? That would only be 26% EPS growth.


The bottom line is that this story is still a great long-term stock. CEO Shaich has been around the block once before with Au Bon Pain and knows some of the pitfalls to avoid when it comes to managing publicly traded restaurants. But, while the share price knife is falling, there's no reason to try to catch it, even though I have been a buyer ever since $65 was breached.

Here is an interesting piece -- check out this piece from the Motely Fool from just late April (when the stock was trading in the low $70s!!)

The market seems to be hesitant to push the price into the upper range of its historical valuation, even though full-year guidance for diluted EPS was raised again. That could be due to lower expectations of same-store sales in the second quarter from a shift in the timing of the Easter holiday, or that the strong second half of 2005 will make it more difficult to outperform in the later half of this year.


Whatever the reason, I do have to disclose that I am bitter for missing the drop to the low 50s last fall. At this point, I'm probably just hoping the market will miss the forest for the trees at some point and misleadingly punish the stock. But I have yet to find a situation where chasing a stock is good in the long term, so I'm not about to start now.

Jim Cramer's thoughts on July 26th:

Cramer told his first caller that Panera Bread (PNRA - commentary - Cramer's Take) reported a stellar quarter but that it "committed the unpardonable sin of saying it will not do as well in the future."

However, Cramer said that this might not be an entirely bad thing. The downbeat guidance will cause analysts to downgrade the stock, which will reset expectations for the company lower.

There comes a time when we have to recognize that sometimes when a company says great things and then says that expectations are too high, the company is just telling Wall Street to not get ahead of the story.

The company is doing fine, he said, but it just doesn't want anyone to believe that it's doing better than it is.

He said that the stock will churn until it reports again next quarter, when it is likely to meet the new lowered expectations. Then the stock should run higher. Cramer said he would wait a month for the market to fully digest the screw-up, and then he would start building a position.

S&P 500 P/E Ratios By Sector

Link to an entry on one of my favorite Blogs.

5 Best Personal Investing Books

In the spirit of my entries on Benjamin Graham comes the "Five Best Books on Personal Investing" as listed by the Wall Street Journal on April 15, 2006.

1. "Money Masters of Our Time" by John Train (HarperCollins, 2000).
I am an advocate of market-tracking index funds, so this might seem like an odd book for me to recommend. John Train profiles 17 renowned money managers, combining entertaining biographical sketches with breezy descriptions of their investment strategies. The folks profiled, including Warren Buffett, T. Rowe Price, George Soros and John Templeton, all made their names by generating outsized investment returns. Meanwhile, I am convinced that the financial markets are reasonably efficient and that investors are better off avoiding costly efforts to beat the market averages. Still, early in my career, I read a slightly different version of this book--and it was maybe the first book that got me truly excited about investing. And besides, even if you're going to index, it is important to know how the enemy thinks.

2. "Capital Ideas" by Peter Bernstein (Free Press, 1991).
If John Train gives you a great introduction to traditional active investing, then Mr. Bernstein's book is the antidote, telling the story of how finance professors turned Wall Street upside down by bringing academic rigor to the investment process. Sure, a book devoted to the capital-asset pricing model and the Black-Scholes formula might sound like heavy going. Yet it's a gripping tale. Before the 1970s, professional money managers were assumed to beat the market and controlling investment risk was a rough-and-ready business. But as the insights of Harry Markowitz, William Sharpe, Eugene Fama and other academics took hold, the business of managing money was forever changed.

3. "Winning the Loser's Game" by Charles Ellis (McGraw-Hill, 2002).
When novice investors ask what to read, this is the book I usually suggest. Charles Ellis provides an easily digestible introduction to sensible investing--in other words, he is a fan of indexing--and he does it in a brisk 182 pages. The book's title reflects Mr. Ellis's contention that investment management has become a loser's game, where trying to win is the surest way to lose, because you are competing against so many other talented investors and because of all the investment costs you incur. My only complaint: Earlier versions of "Winning the Loser's Game" were even shorter and hence more digestible. In fact, on my desk, I have the 1985 version of the book, which I borrowed from the Dow Jones company library in 1990 and somehow neglected to return. That one is a wonderfully brief 81 pages.

4. "The Four Pillars of Investing" by William Bernstein (McGraw-Hill, 2002).
Mr. Bernstein (no relation to Peter) is a semiretired neurologist in North Bend, Ore., who didn't get around to applying his considerable intellect to finance until he was in his 40s. Yet over the past decade I have probably learned more from chatting and emailing with him than from anybody else. This book will give you a taste of his thinking, including what to expect from different asset classes and how to build a winning portfolio. Think of Charley Ellis's book as your introduction to investing and Bill Bernstein's tome as the second semester. Full disclosure: Before publication, I read and commented on the manuscript of both this book and the fourth edition of "Winning the Loser's Game."

5. "Fooled by Randomness" by Nassim Nicholas Taleb (Thomson Texere, 2004).
If you're going to survive on Wall Street, you don't just need to be wary of brokers, insurance agents, financial journalists and overhyped mutual funds. You also need to guard against your own self-confidence. That is where Mr. Taleb's quirky book comes in. "Fooled by Randomness" is a delightful mix of mathematical insights, philosophical ruminations and intriguing anecdotes. Think you've found the next superstar mutual fund? Convinced you've detected some stock-market pattern that foretells fabulous returns in the months ahead? Spend a few minutes with Mr. Taleb's book, and he should be able to talk you down.

Place For Cash: High Yielding Online Savings

Hottest Piggy Bank Is Online Higher Yields Make Web-Based Savings Accounts More Popular

By NICOLE URBANOWICZ
Wall Street Jounrnal
July 15, 2006; Page B4

Online savings accounts -- with yields now surpassing the 5% threshold -- are becoming an enticing place to stash cash despite the security concerns.


While traditional short-term cash investments like CDs and money-market accounts have been on an upswing, online savings accounts are severely beating their traditional banking counterparts. And with short-term interest rates reaching their highest levels since 2001, keeping cash liquid is a good bet as analysts expect interest rates to rise.


The recent jump in interest yields are thanks to the Federal Reserve's cumulative 4.25-percentage-point increase in interest rates in recent years. Also, competition is growing among financial institutions, which is pushing more brick-and-mortar banks into the booming, low-overhead online-banking business.

Nearly a year ago, some of the first online savings accounts with 3% to 4% annual percentage yields were considered attractive. Today, the highest-yielding online savings accounts of 5% are competitive with money-market mutual funds, which invest in short-term fixed-income securities and aren't insured by the Federal Deposit Insurance Corp. They are even above the overnight average for a money-market savings account, which is currently hovering around a 3.31% annual percentage yield, according to Bankrate.com.


London-based HSBC Holdings PLC's online savings arm, HSBCdirect.com, has one of the top savings rates in the U.S., according to Bankrate.com, with a 5.05% annual percentage yield.


Citigroup Inc.'s Citibank NA is also competitive with a 5% APY for its e-Savings account. This is the same account the company began piloting almost a year ago at 3.25%. And Emigrant Direct, the online-banking unit of Emigrant Savings Bank, is also on the top rung of the highest-yielding online savings accounts with its 5% annual percentage yield.

Bank Follow-up (Updated 7/20)

As a follow-up to Big Banks = Juicy Returns? comes some commentary today.

David Weidener discusses the other side of the financial conglomerate coin in his piece - Diversified but Diluted: Unlikely to ever be fully valued.

The bottom line is this: the big diversified banks do provide a steadier stream of profits, but they depend on being big and having scale. Because they have commoditized everything from brokerage services to home lending, they must continue to acquire smaller rivals to keep market share and maintaining the ability to buy in bulk.


Each quarter some businesses will do well at Citigroup, others won't and it's less likely that Citigroup will produce the kind of quarter recently produced by Goldman Sachs.


"It is safe to state that at virtually no time in the past 20 years has the market value of the large banking conglomerates equaled the sum of their parts," Punk Ziegel & Co. analyst Richard Bove wrote recently. "This includes many more companies than just Citigroup."

Conglomerates, supermarkets -- whatever one chooses to call them -- do not work as intended but they do work. In the corporate and institutional world bankers use the bank balance sheet to finance deals and win advisory assignments. In the retail world, bank customers do buy some other financial products from the same company.
Because they operate more like machines, big conglomerates create a marketplace for nimble and smaller competitors.

Updated on July 20th:

BofA, JPMC, Wachovia, and Citi all announced great earnings this week...and their stocks all moved nicely. Of the names, I think that JPMC has the most opportunity for near to mid-term price appreciation in their stock for many reasons - including the fact that they have lagged the market for the last five years while of BofA has experienced appreciation. Additionally, the cost reductions and the efficiencies of the new JPMC (that includes Bank One) have taken root.

The Wall Street Journal had a nice article on this stuff today.

Street Sleuth
Top 3 U.S. Banks Seek Organic Growth, A Luxury Smaller Rivals May Not HaveBy VALERIE BAUERLEIN and ROBIN SIDEL
July 20, 2006; Page C1

After years of making blockbuster acquisitions, the three largest U.S. banks are now concentrating on building from within, a strategy that should leave them in better shape than smaller, regional banks as the economy cools.

Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co.'s pursuit of "organic" growth comes as smaller, regional bank competitors continue to pursue mergers that they hope will help them combat a weaker outlook for traditional lending.

Second-quarter profit jumps reported yesterday by Bank of America and J.P. Morgan -- the second-largest and third-largest banks by stock-market value -- echoed the competitive advantage the two and the largest bank, Citigroup, could enjoy over smaller rivals whose narrower business lines had previously enjoyed investors' favor.

While that crucial gap has been narrowing for about the past two years, big banks like Bank of America and J.P. Morgan have been able to use trading operations, credit-card units and other businesses as shock absorbers for slower growth in core loans and deposits.

In contrast, regional and community banks are generally posting decent earnings growth but relying more heavily on the release of loan-loss reserves and unusually pristine credit quality.

To be sure, the biggest banks have little choice but to grow organically. Bank of America holds the regulatory limit of 10% of U.S. deposits and can't do a deal that would put them over that. Citigroup is just emerging from regulatory scrutiny; in April, the Federal Reserve cleared Citigroup to pursue acquisitions, lifting a yearlong restriction that was imposed following a string of missteps. J.P. Morgan is still assimilating its businesses following the $58 billion acquisition of Bank One Corp. in 2004. Prices of smaller banks in desirable areas are also high, as a takeover premium is baked into the share price.

MDT: Been Around 52 Week Low

MDT: Medtronic
Current Price: $47.59
Est Market Cap: $56.8 Billion
Est P/E (LTM): 22.75
Est P/E (current): 19.4
52 Week Range: $46.41 - $59.87

Medtronic, Inc. is engaged in medical technology. The Company functions in seven operating segments that manufacture and sell device-based medical therapies. Its operating segments include Cardiac Rhythm Disease Management (CRDM); Spinal and Navigation; Neurological; Vascular; Diabetes; Cardiac Surgery, and Ear, Nose and Throat (ENT).

I've sporadically followed MDT in the past. One of those "good companies that you always looking for the right time to get in". Has that time come? I've seen the stock discussed in a couple of outlets as of late and most of the its coverage has recently turned to "Buy/Outperform" with 12-month price estimates ranking from anywhere between $60 and $67.

For example:

* Argus upgraded to a Buy just last week.

* Goldman Sachs rates MDT an Outperform

* Standard & Poor's rates 4 STARS (out of 5) since May 24, 2006

* Reuters Research Rating of 34 brokers is OUTPERFORM with a range of B

S&P says:

The shares historically commanded a forward P/E premium to large cap medical device peers, but are currently priced in line with peers. In our view, the stock warrants a premium due to MDT's balanced revenue base, dominance in cardiac rhythm management and potential in the drug-coated coronary stent market. Our 12-month target price is $60, or 24.5X our FY 07 EPS estimate, translating into a forward PEG ratio of 1.5X, a modest premium to the large cap device group.

The following is some commentary from an Argus Report:

Medtronic, the world's largest maker of pacing and cardiac rhythm devices, reported
fiscal 4Q06 net income of $747 million or $0.62 per share, compared to $194 million or $0.16 per share in the year-ago period. Excluding one-time charges, net income and EPS grew 16% and 17%, respectively. Revenue increased 11% to $3.1 billion. Excluding a negative foreign currency impact of $69 million, revenue grew 13%. Sales in the U.S. grew 11%, while international sales grew 10% (or 17% in constant currency). Medtronic appeared to have gained share in the market for implantable cardioverter defibrillators (ICDs) over St. Jude Medical as well as Boston Scientific, which acquired Guidant and its ICD business.

For the most part, every product line showed improvement. Sales of cardiac rhythm
management (CRM) devices increased 10.5% year-over-year to $1.4 billion. Within the
CRM category, sales of ICDs increased 12% overall (14% on a constant currency basis) to $768 million. In the United States, ICD sales grew 9% year-over-year to $580 million and internationally they grew 25% to $188 million. Management estimates that MDT's share of the global ICD market is now 53%, up one percentage point from 3Q06 and up three points year-over-year. Pacing sales rose 7% to $467 million, after falling 1.2% in 3Q06.

Spinal and Navigation sales grew 16% year-over-year to $618 million, after rising 18%
in 3Q06. Neurological sales grew 9.3% to $282 million, after rising 6% in 3Q06. Sales of neuromodulation devices grew 17% to $240 million. Vascular sales, which includes
coronary stents, grew 17% to $273 million. Coronary stent sales of $114 million included $59 million in sales of the Endeavor drug eluting stent. Diabetes sales grew 5%, ENT sales grew 7.1%, while Cardiac Surgery sales declined 1.1%.

Gross margin improved to 75%, up 40 basis points from fiscal 2005 and 20 basis
points from 3Q06. R&D spending increased 19% to $294 million, accounting for 9.6% of
revenue. The company intends to complement internal R&D activities with the acquisition of technology and intellectual property. SG&A spending increased 13.7%, or slightly faster than revenue, to $975 million. Spending increased to expand the CRM sales force, with particular focus on reps calling on referral physicians.

For fiscal 2006, net income was $2.55 billion or $2.10 per share, compared to $1.80
billion or $1.48 per share in 2005. Revenue increased 12% (13% on a constant currency
basis) to $11.3 billion. Foreign currency translation had a $118 million negative impact.

EARNINGS & GROWTH ANALYSIS
Given the strong 4Q performance, MDT management increased its FY07 and FY08
guidance. For FY07, the company expects EPS of $2.40-$2.48, including $0.12 per share
of stock option expense, compared to its earlier forecast for $2.50-$2.55, excluding option expense. Taking into account these expenses and the effect of a recent convertible debt offering, this revision raises the guidance by $0.02 on low end of the range and by $0.05 on the high end. The company maintained its 2007 revenue guidance at $12.5-$13 billion, implying year-over-year growth of 11-15%.

For fiscal 2008, the company revised guidance to $2.78-$2.88, including $0.12 per
share of option expense, from a prior $2.88-$2.98, essentially boosting its forecast by two cents. It also kept its revenue guidance at $14-$15 million, implying growth of 14-18% from 2007 targets.

We are encouraged by management's increased guidance. We believe that it suggests
that the underlying demand for cardiac devices, spinal implants, and other medical devices is healthy. Looking forward, we think that Medtronic will get greater contributions from ENT (eye, nose and throat), neuromodulation and spinal product lines. Meanwhile, the company is expanding its cardiac devices sales force, focusing on reps that call on referral physicians. Moreover, Medtronic is increasing its R&D spending while investing to acquire technology and intellectual property.

For these reasons, we have effectively raised our fiscal 2007 EPS estimate by $0.06 to $2.44. (We note, however, that in contrast with our prior published estimate of $2.50, our current forecast assumes $0.12 of stock-option expense.) For FY08, we are establishing a preliminary estimate of $2.83 per share, also including $0.12 of option expense. Our dividend estimates are $0.43 per share for fiscal 2007 and $0.45 for fiscal 2008.

Starting Over: Must-Reads For Investors

Gentlemen...

With Jennifer's father's health issues along with Stephen & Ali's new jobs (and Ryan's shitty job)...none of us have really had that much time to devote to this blog.

With that said, I am hoping that we are all in a good spot now where we may have some opportunity to devote to the blog and some investment conversation. Additionally, it would be nice if we had a few other folks that may want to join us.

Since we are effectively "starting over" tonight, I am I am going to direct your attention to a recent Business Week article/slide show that is titled, "Must Reads For Investors".

Of course, the very FIRST book highlighted is "The Intelligent Investor". I figure that this is a perfect opportunity for total 'renewal' tonight and I will therefore link to my very first entry on the blog.