I'm putting this one up quick because I need some feedback from readers.
My daughter called me from Oxford today. She's a Rule #1 investor. She wanted to go over Panera Bread: PNRA. See what I think. So we took ten minutes on the phone and looked at it together. Until 2000 the business was trying to figure itself out. Then it got it together and has been on a rocket ride ever since. For a Rule #1 investor the first question is "Do you want to own the whole thing?" and her answer is...
"Absolutely, Dad. I drive an hour to go eat there because they have the best bread and the best food. I LOVE Panera Bread. They make everything from scratch every day and it is sooooo good." Okay so she wants to own it because she loves what they do. That's cool.
But does she understand the business? "It's a restaurant that is using the best ingredients, natural foods and gets the food out quick. They are going to take a big bunch of business from the fast food places as people get more and more interested in quality." Okay -- she understands the game plan.
Does it have one of the Five Moats: Brand, Secret, Price, Switch or Toll? "It has a growing Brand Moat. Their name is becoming a symbol for amazing quality and fresh food."
But do the numbers back that up? So we got online and went through the Big Five together, looking specifically at the last five years since before that it was struggling:
1. ROIC: 14%
2. Equity Growth Rate 22%
3. EPS Growth Rate 48% to 25%
4. Sales Growth Rate 33%
5. Cash (operating) Growth Rate 35%
The numbers look awesome. Consistent. The biggest weakness in the numbers is that they are not as old as I would like. I told my daughter that if there is a problem with this process it's that we are dealing with a business that is just getting going. We'll have to factor that in as we go, but it certainly has a growing solid Moat.
Before we go look at Management, I thought we should do a quick MOS analysis. I asked her what EPS growth rate I should use. She said we should look up what the pros are predicting. Right on. Looked it up. 25%. Looks reasonable so we ran the MOS.
Here's what we need to know:
Future PE: the lower of historical or 2x EPS Growth Rate
Future EPS Growth Rate: the lower of historical estimate or analyst estimate.
Current EPS:
She said, "Let's use the analysts' 25% growth rate estimate, the historical PE is 40 which is lower than 2 x 25 and the current EPS is $1.38. Do the =FV() thing and you get a future stock price of $514 per share. Do the =PV() thing on that with our minimum 15% rate of return and it tells us we have to buy the stock at $127 to make 15%. That's the Sticker Price so the Margin of Safety Price is half of that: $64."
The business is selling for $60 this morning. Below the MOS. Awesome!
She said, "So will you do the rest of it for me? The Management stuff?"
Usually I'd tell her "No", but she's writing her Master's thesis and I felt sorry for her so I told her that I'd do it. Haven't yet.
Maybe you guys should do it for me. What do you think? Does PNRA have Rule #1 management? Is it YUMMM?
And hurry up, will you? This thing looks too good to last!
