Tasty trio: Panera, Chipotle, Whole Foods
These companies are good for your appetite and investment portfolio.
By Stephen Leeb, The Complete Investor
In our search for 'tasty investments,' we looked for food companies with the potential to maintain rapid growth and chalk up stock gains by virtue of offering consumers a compelling mix of decent nutrition and sufficient calories at a reasonable price.
Panera Bread gets the highest nutritional grade from Health magazine. Its more than 1600 stores in 44 states and Ontario offer fresh store-baked breads and a wide selection of salads and sandwiches. About half its bakeries and cafes are franchises, while half are company-owned.
The balance sheet is debt-free, with free cash flow plentiful. Earnings growth over the past five years has averaged 20% a year, and with the company still relatively small, this pace should be maintainable for the foreseeable future. With a PEG ratio slightly above 1, the stock seems primed to outperform the market.
Chipotle's more than 1,000 company-owned food outlets offer healthful Mexican fare including burritos, tacos, and salads designed to appeal both to the growing Hispanic population in the U.S. and to other demographics.
Profit growth has averaged 30% a year over the past five years, propelled by rising same-store sales and new stores. Cash flow is solid, allowing for share buybacks in conjunction with a virtually debt-free balance sheet.
The chain's enlarged base could slow growth somewhat to a still rapid 20 to 23% pace, keeping the PEG reasonable.
Whole Foods is built around organic and natural foods. Despite the higher prices such foods command, sales are growing more than twice as fast as overall food sales.
Its dominance in this market gives Whole Foods both scale and pricing power, letting the company buy goods more cheaply than competitors can and earn higher margins, while promoting greater values so as to attract more shoppers.
Whole Foods' same-store sales growth and operating margins far exceed those of other supermarket chains. Profits shrank during the 2008-09 recession, leading the company to emphasize value. But growth subsequently resumed.
Profits in fiscal 2014 should exceed 2.5 times 2007's earnings, for average annual growth of over 17%. If the economy expands even modestly in the next several years, Whole Foods' earnings should grow by at least 20% annually.
The stock isn't cheap, but with investors likely to support a premium multiple for some time to come, the shares should rise in line with earnings.
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