Market Overview

Buffalo Wild Wings Surprises The Street; Panera Hit By Profit Taking


Two fast growing restaurant companies released their quarterly earnings results on Tuesday after the closing bell. Both Panera Bread (NASDAQ: PNRA) and Buffalo Wild Wings (NASDAQ: BWLD) have been very hot stocks for years now. If you add in Chipotle (NYSE: CMG), these three companies form a growth trifecta in the casual dining segment that has absolutely trounced the broader market.

Looking to beat the Wall Street big boys with a decidedly low-tech and easy to understand portfolio? If so, you need to have these three companies on your radar screen. For the average investor looking to add some alpha to their portfolio, these stocks have some terrific qualities. First, their businesses are extremely easy to understand. This fact should not be overlooked as it is an incredibly attractive property in a stock.

In fact, only investing in businesses that are easily understandable and predictable is a hallmark of Warren Buffett's investment strategy. Due to the nature of the restaurant business, financial statements and comparisons are usually cleaner and more straightforward than what you will find in a multitude of other sectors.

This simplicity gives investors consistent clarity about how the business is currently performing and allows for more accurate projections of future revenue, earnings, and cash flows. If you examine a simple bar chart showing annual revenue, net income, and profit margins at Panera, Buffalo Wild Wings, and Chipotle, you will get the picture fairly quickly and understand why their stock prices have been consistently rising. With respect to top line growth, in particular, all three of these companies have registered very strong year over year gains going back to 2006.

Another attractive quality that all three of these companies share is their expanding brand recognition. In the consumer segment, this is one of the most valuable assets that a business can cultivate and Panera, Buffalo Wild Wings and Chipotle find themselves in a sweet spot. While their brands are widely recognized and perceived positively by many consumers, they are hardly mature and have plenty of room to grow.

The trends that are taking place in the casual dining segment, and at these three companies, are lining the pockets of investors. Let's take a look at the historical performance of Panera, Buffalo Wild Wings, and Chipotle before examining yesterday's highly anticipated earnings reports from the first two companies.

Buffalo Wild Wings (BWLD) shares have risen roughly 600% over the last 10 years and more than 200% during the past 5 years. During the last 52-weeks, the stock is up 70% (wow!). Panera has gained 420% during the last decade, 157% over the last 5 years and more than 50% in the last year alone.

Since going public at the beginning of 2006, Chipotle has risen 780%, with most of those gains coming in the last three years. On the 5 year chart, CMG is up 519%, including roughly 50% over the last year. Do I need to remind you what the market has done over this time?

This has been one hot sector for a long time - and PNRA, BWLD, and CMG are the best casual dining stocks in the market. Not surprisingly, Wall Street was eagerly awaiting quarterly results from Panera and Buffalo Wild Wings on Tuesday afternoon. While the stocks are headed in different directions, neither disappointed.

Panera reported Q4 adjusted net income of $38.62 million or $1.31 per share, compared to $36.52 million or $1.21 per share, in the year ago period. On an adjusted basis, which is comparable to analysts' consensus, net income was $41.70 million or $1.42 per share. This was in line with Wall Street analysts' consensus EPS estimates.

Revenue for the quarter was up a healthy 16 percent to $495.77 million versus $428.16 million in last year's corresponding quarter. This missed Street consensus of $499.03 million. While revenues for the quarter were a little light and EPS was just in-line, PNRA provided strong forward looking guidance. The company sees EPS in a range between $1.33 and $1.35 for the first quarter versus Street estimates of $1.28.

For fiscal 2012, PNRA now sees EPS in a range between $5.50 and $5.55 versus its previous forecast of $5.38 to $5.48. Analysts are currently projecting that PNRA will earn $5.52 per share for fiscal 2012. During Wednesday's trading session, PNRA is trading down roughly 6% on a combination of profit taking and some disappointment over the Q4 revenue miss.

Despite the stock trading off a little bit on Wednesday, there is little in the report that would suggest that the long-term PNRA story is not intact and continuing to accelerate. Buffalo Wild Wings (BWLD) said on Tuesday that its fiscal Q4 net income was $13.63 million or $0.73 per share, compared to $10.17 million or $0.55 per share, in the year ago period. This easily exceeded analysts' consensus EPS estimates of $0.67.

Revenues at the company were up 34.5 percent to $220.46 million versus $163.94 million in last year's fourth quarter. This also came in ahead of Street estimates of $210.48 million. Looking ahead to fiscal 2012, BWLD maintained its view for earnings growth of 20 percent. President and CEO Sally Smith said, "With our strategic focus on guest experience and operational excellence, our ongoing sales strength and unit-level execution, and the benefit of a 53rd week, we will overcome rising commodity costs and achieve 20% net earnings growth for 2012."

In after hours trading on Tuesday, BWLD shares exploded higher in the wake of the report. On Wednesday, the stock has rocketed up 14.23% to $80.18. The reaction in the name is largely a result of building pessimism surrounding the name in recent weeks as the price of chicken wings has surged. A number of analysts had downgraded the stock and their earnings estimates for the company due to rapidly rising wing costs.

When the fears about this quarter and the potential for lower forward looking guidance proved to be unfounded, traders reacted by aggressively bidding up the shares. Buffalo Wild Wings is now sitting at a new 52-week high, while PNRA put in a new 52-week high yesterday before pulling back in the wake of its earnings report.


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