Chipotle vs. Panera: Clash of Fast-Casual

Chipotle and Panera are booming, but which offers a superior investment?
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BOSTON (TheStreet) -- Americans can't get enough of Panera's (PNRA) sandwiches, and investors are buying up its stock.

Panera's second-quarter earnings and sales narrowly beat analysts' expectations, signaling fewer looming surprises than in years past. Although Panera is attractively priced relative to other restaurant stocks, its trajectory is predictable, with the potential for downside surprises.

Chipotle

(CMG) - Get Report

, which exceeded profit and revenue estimates by a wider margin than Panera, is a superior restaurant stock.

Chipotle and Panera resonate with so-called conscious consumers, Panera for its nutritious approach to fast-casual and Chipotle for its support of meats from local and naturally raised animals. While Panera's customer base is loyal, Chipotle has inspired fanatics because of its high-quality ingredients and efforts to avoid factory-farmed protein. All of its beef, pork and chicken is raised free of anti-biotics.

The other unique wrinkle to Chipotle is its growth strategy. It has shirked the franchise model, allowing it to control its brand and maintain a steadfast commitment to the "food with integrity" program. This has, indisputably, imposed a governor on growth. But it generates patron loyalty by ensuring a consistency at all restaurant locations. This strategy is unique in the fast-casual space. Panera is a viable restaurant investment in its own right. But Chipotle's fundamentals, margins and quality-control justify its relative premium.

Chipotle Stock Rating Report (CMG) Rating and Financial Analysis

Here are the numbers: Panera's quarterly net income rose 33% to $27 million as earnings per share expanded 31% to 85 cents and revenue grew 14%. Its system-wide comparable bakery-cafe sales increased 9.9%. Chipotle, on the other hand, boosted second-quarter revenue 20%, beating Panera. Its net income rose 31%, less than that of Panera, but its earnings per share outpaced Panera's growth, expanding 33% to $1.46. Chipotle's comparable-store sales lagged Panera's tally slightly, gaining 8.7% for the quarter and 6.6% for the first half of 2010.

Panera boosted its quarterly operating margin 230 basis points to 12%, whereas Chipotle widened its operating margin 90 basis points to 16%. Impressively, Panera has expanded its operating margin by at least 100 basis points for nine consecutive quarters. But Chipotle's spreads are higher. Its net margin of 10% beats Panera's 7.1%. Also, Chipotle's three-year sales-growth rate of 21% is greater than Panera's 16%. Chipotle opened 25 new restaurants during the quarter, whereas Panera opened 13 and closed two for a net gain of 11.

Both companies have superb balance sheets, but Chipotle's is slightly more liquid. Panera hasn't released its 10-Q, so one can't compare the most recent balance sheets. However, Chipotle held $307 million of cash and equivalents at the end of the second quarter, and carried just $3.8 million of debt. Panera had $305 million of cash and equivalents at the end of the first quarter, and had no debt. Chipotle's quick ratio of 3.1 beats Panera's 2.2 tally.

Panera's stock has outperformed Chipotle's over a three-year span, returning 23%, annualized, while Chipotle's rose 16%. In the past 12 months, Panera has gained 42%, whereas Chipotle has advanced 59%. In 2010, Chipotle is also leading, having soared 74%, trumping Panera's 17% advance. Chipotle costs investors 32 times trailing earnings and 25 times projected earnings, whereas Panera costs 24 and 29, respectively.

Chipotle's PEG ratio, a measure of value relative to predicted long-run growth, of 1.1, signals that it is overpriced by 10%. Panera, on the other hand, has a PEG ratio of 0.9, reflecting a 10% discount to fair value. Also, Chipotle commands a free cash flow multiple of 28 and a book value multiple of 5.5, whereas Panera costs just 14 and 3.8, respectively.

Panera is the more attractive investment based on valuation, but Chipotle is still preferable because of its unique strategy. It's still an attractive time to go long on burritos.

-- Reported by Jake Lynch in Boston.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.