Stifel: Sell Panera On A Likely Recession

Stifel’s Paul Westra expects the U.S. economy to potentially fall into recession within the next three to nine months.

Westra downgraded the rating on Panera Bread Co PNRA from Hold to Sell, with a price target of $175.

Potential Recession

“Restaurant stocks are monolithic as ~75 percent of names tend to outperform/underperform together throughout a business cycle – such that getting the "sector call" correct represents the vast majority of the potential alpha creation,” the analyst explained.

Specifically, Westra has revised the two-year, industry-wide comp estimate to a below-consensus level of 0.5 percent, along with expectations of an increase in industry discounting, which historically accompanies recessionary slowdowns.

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Due to this assumed worsening macro and competitive environment, the comp and EPS estimates for 3Q16, 4Q16 and 2017 have been lowered to below consensus levels.

Reasons For Bearish Stance

Westra explained that the “bearish” stance was based on three reasons. Firstly, “2Q16’s simultaneous comp deceleration across every industry sector portends to a lasting dining-out slowdown,” the analyst stated.

Secondly, historically, the restaurants sector has witnessed more than two years of “margin-degrading” negative relative pricing power when dining-out starts to decline, with discounting quickly rising to counter the falling sales.

Thirdly, Westra pointed out that through the year preceding the last three recessions in the United States, restaurant stocks have, on average, declined 23 percent.

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