Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Panera Bread fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Panera Bread.
What We Want to See
Pass or Fail?
5-year annual revenue growth > 15%
1-year revenue growth > 12%
Gross margin > 35%
Net margin > 15%
Debt to equity < 50%
Current ratio > 1.3
Return on equity > 15%
Normalized P/E < 20
Current yield > 2%
5-year dividend growth > 10%
4 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Panera Bread last year, the company has dropped a point, as its revenue growth slowed down just enough to pull its long-term growth rate below 15%. The stock hasn't performed all that well recently, remaining roughly flat over the past year.
Panera has had unusual success in bucking the trends that have hurt some of its fellow eateries. Even as other restaurant chains have had to cut prices and focus on promotional deals, Panera has raised prices to support an expanded menu. By moving into pasta, Panera is catering to its high-income customer demographic, which has held up far better during the recession and slow recovery than their lower-income counterparts.
Part of Panera's strength has come from its attention to high-quality healthy food. But Panera also took a page from Starbucks by making its locations not just a place to eat and run, but a home away from home, with Wi-Fi and permission to stay as long as customers want. Just as Starbucks has reaped the benefits of creating its own culture, so too is Panera building a competitive advantage over less customer-friendly restaurants, where such behavior would be frowned upon as loitering, rather than encouraged.
In its most recent quarter, Panera once again demonstrated its resiliency. Comparable store sales jump 5.1%, while weekly average sales rose 13%. Most importantly, food costs stayed below 30%, even as rival health-conscious chain Chipotle has fought against margin pressure from high food ingredient prices.
For Panera to improve, it needs to keep its sales growth rising, and its earnings to catch up to its stock price. If the economic recovery starts to accelerate, then Panera looks well-positioned to take full advantage and get closer to perfection in the near future.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
Don't stop here in your look at Panera. Read more about the company in our premium research report on Panera, in which you'll discover why there's reason to believe that the best is still yet to come for the fast-growing bakery company. Included are key areas that investors must watch, as well as opportunities and threats facing the company both today and in the long term. Don't miss out on this invaluable investor's resource -- simply click here now to claim your copy today.
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The article Has Panera Bread Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger 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. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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