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Better Buy: Chipotle Mexican Grill, Inc. vs. Panera Bread


Image source: Panera Bread.

The fast-casual craze has taken the restaurant industry by storm, and Chipotle Mexican Grill (NYSE: CMG) and Panera Bread (NASDAQ: PNRA) have both staked their claims to their respective segments of the fast-casual space. Chipotle has gone through some recent challenges that have brought its fast-paced growth to an abrupt halt, and Panera has tried to take advantage despite having seen slower growth rates than Chipotle during its heyday.

With the two stocks having gone in opposite directions lately, investors want to know which one is the better buy right now. Let's take a closer look at Chipotle and Panera, comparing them on a number of metrics to see which one looks more attractive right now.

Valuation and stock performance

Panera and Chipotle have seen their share prices go in opposite directions over the past year. Since May 2015, Panera has given shareholders a 16% positive return. Chipotle has fallen almost 30% over the same period.

Ordinarily, when stocks diverge, it can create valuation disparities that lead to opportunities for the beaten-down company. However, when you look at some simple valuation measures for both companies, you'll find that this isn't the case with Chipotle and Panera. Chipotle currently trades for about 42 times trailing earnings, compared to a trailing earnings multiple of 35 for Panera. The situation doesn't change even when you consider near-term future expectations for earnings to grow. On a forward-looking basis, Panera trades at 27 times forward earnings, compared to a 37 forward earnings multiple for Chipotle. Even with Chipotle's share-price declines, its valuation reflects a fundamental drop in net income potential that could hold the stock back for a while.

Dividends and return of capital

Neither Chipotle nor Panera has ever paid a dividend, so it's impossible to compare the two fast-casual companies on that benchmark. However, looking more broadly at returning capital to shareholders, Chipotle has dramatically ramped up its repurchases of stock over the past six months. During the past two quarters, Chipotle has spent almost $900 million on buying back its stock. That's up from an annual pace of between $60 million and $220 million over the past several years.

Panera has also followed suit with using share buybacks to return shareholder capital. Since 2013, the company has made annual repurchases of between $160 million and $405 million, and over the past four quarters, the fast-casual bakery cafe has bought back at least $100 million in stock each quarter. With its much smaller market cap, Panera has an edge in treating its shareholders well.

Growth

The major concern facing the fast-casual segment right now is whether it can keep growing at its past rate, and that's a bigger immediate issue for Chipotle than Panera. Chipotle's most recent quarter featured comparable-restaurant sales that plunged almost 30%, and the company posted its first-ever quarterly loss due to ongoing fears stemming from food-borne illnesses last year. Those following the company expect continuing weakness into the future as customers have to regain confidence in Chipotle's food offerings. Longer term, most investors believe Chipotle's business will bounce back, but that could take long enough that share-price gains won't come quickly.

By contrast, Panera hasn't had to deal with major disruptive events, but its growth rates haven't been as attractive as Chipotle's during the Mexican-food specialist's best periods. Comparable-restaurant sales for the company's most recent quarter came in at 6.2% for company-owned cafes as systems allowing customers to order and pay for their meals electronically have started to pay off. That's quite strong for Panera, but it falls short of the double-digit comps Chipotle has seen at various times during its most successful periods. However, investors are optimistic about the Panera 2.0 initiatives and their continuing support to the fast-casual chain's results, and it's possible Panera can keep accelerating into the future.

For now, Panera looks like the better buy between the two stocks. Its valuation, stock buybacks, and growth potential provide a favorable mix. Chipotle will have to demonstrate its ability to bounce back in the long run in order to get back its once-considerable momentum.

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