The Numbers

In fundamental analysis, investment experts often disagree about the ratios to consider. We'll stick with those we've grown to know and love: sales growth, EPS, profit margin, ROE, PE, and PEG.

Sales growth. Two approaches to examining sales growth are helpful here. First, you can graph sales over time in order to see the growth visually. Second, you can calculate the exact change in sales from year to year--and then figure a long-term average. Over the last five years, sales at Panera have grown at a high, steady rate.

The steady growth in sales indicates a high-quality company. A company with the same rate of growth, but with sales that zigzag up and down from year to year, is less predictable and of lower quality.

An average growth rate of 33.5% is remarkable. Panera is not likely to sustain such a high rate, but the company has demonstrated that more than just good luck is behind its current success.

Earnings per share. These are EPS figures as reported by Standard & Poor's at the BetterInvesting web site:

As you can see, earnings per share also increased steadily in the last five years, making Panera a true growth company. A growth company's sales and EPS grow at a rate greater than that of the market. Over the long term, Panera's sales and earnings growth should produce comparable growth in stock-price appreciation.

Profit margin. Pre-tax profit margin is considered a good measure of management's performance because managers have control of all of the expenses incurred--cost of goods sold, operating expenses, and interest--up to the point of taxes. Pre-tax profit margin can be interpreted as the amount of each sales dollar left before taxes are paid.

For 2000 through 2004, the average pre-tax profit margin is 11.4%, with an upward trend. As confirmation of this trend, in the most recent quarter (ending December 27, 2005), Panera reports a pre-tax profit margin of 14.7%.

Are these numbers worth getting excited about? Yes. The upward trend means that management is becoming more effective at controlling costs. And, Panera is doing as well as the industry leader, Starbucks, whose average is 11.3%.

Return on equity (ROE). ROE is another great measure of management's talent. Keep in mind the basic accounting equation, Assets = Liabilities + Shareholders' Equity--or stated another way, Assets – Liabilities = Shareholders' Equity. Shareholders' equity is what's left of a company's assets once liabilities are subtracted. ROE measures how well management turns that equity into more profit.

Panera's average ROE for 2000 through 2004 is 12.9%. (Reaching 10% is considered good.) As management becomes more skilled at running the company efficiently, ROE is expected to increase.

Price-earnings (PE). Now, this is a great ratio. PE tells you at a glance how much investors are willing to pay for each dollar of earnings. A PE of 62.3 means that Panera's investors are willing to pay $62.30 for every dollar of earnings. Compared to its historical PE average of 35.2, Panera's current PE is very high, perhaps indicating an overvalued stock.

Price-earnings and growth (PEG). The PEG ratio compares PE to earnings growth to see if investor expectations are supported by actual growth rates. The EPS used to calculate PEG is an estimate of future earnings per share, not the "trailing-twelve-months" number that typically appears in a stock table. Yahoo! Finance uses a five-year projection of growth and includes the PEG ratio on each stock's key statistics page. Here's how Panera compares to Starbucks:

Starbucks (SBUX)  2.16

Panera (PNRA)      1.63

When expectations and earnings are perfectly matched, PEG is 1. For both stocks here, investor expectations are high given projected earnings growth, resulting in PEGs greater than 1. (A PEG less than 1 is ideal, indicating that the market does not yet reflect the company's growth potential.) Although Panera and Starbucks may be overpriced, investors must judge for themselves if expected profits justify paying a high price.

Although many investors think Panera is a wise investment, others believe the company is due for a fall. Investors must draw their own conclusions when assessing a stock's fundamentals.