MorningWord 2/18/14: Retail Therapy For Equities $PNRA $SPY

by Dan February 18, 2014 9:27 am • Commentary

With 400 of the S&P 500 having already reported Q4 earnings results, the focus in the coming weeks will be on a slew of retail and consumer oriented companies who have yet to report like GPS, HD, LL, LOW, M, TGT, TJX & WMT.   While earlier reported results and same store sales from competitors painted a fairly disappointing holiday season, there is also little visibility for the here and now due to extreme weather.

With the S&P 500 having nearly made back all of the last month’s declines, now less than 1% from the all time highs made in January, the outlook of the U.S. consumer could be of particular importance for the Fed’s plan for the continued Taper of QE.  The last 2 weeks of equity strength was in the face of 2 consecutive weak Jobs prints and less than stellar Q1 guidance (per Factset:  66 companies have issued negative EPS guidance and 16 companies have issued positive EPS guidance).  Perhaps we’re back to bad news equals good news as market participants thirst for more Fed stimulus.  The reaction to the next 2 week’s retailer earnings could be telling in that regard.  The key question for market participants is whether an economic slowdown (which is gaining in probability as the data piles up) or the continuation/halt of the Fed’s taper is more important for the stock market’s performance in 2014.

On the Single Stock front:

PNRA, which is set to report Q4 results tonight after the close, caught my eye for 2 reasons.  First, it has had 3 consecutive earnings disappointments.  Second, the stock is still trading at a hefty premium to most of its peers and to its expected earnings growth in 2014.  Meanwhile, its actual earnings growth has decelerated massively in the last 2 years.  The stock trades at 24x expected 2014 earnings growth of only 9%, which was 13% in 2013 and 27% in 2012 and sales growth only expected at 8% this year.  Compare that to SBUX, which is trading at 28x 2014 earnings estimates, with expected earnings and sales growth of more than double PNRA, around 20%.  I know what I would rather own.

The options market is implying about a 6% one day move tomorrow, which is rich to the 4 qtr average one day move of about 4%.  Wall Street analysts are fairly mixed on the stock with 11 Buys, 11 Holds and 2 Sells with an avg 12 month price target of $183.50, only about 3% higher than where the stock is currently trading.

The technical set up is interesting.  The stock is testing a resistance level at $180 that it has failed at two times in the last few months, while $170 seems like a near term support level, with $160 being the next logical stop on a miss and guide down.

PNRA 1yr chart from Bloomberg
PNRA 1yr chart from Bloomberg

Panera has been a major success story in the U.S. restaurant market over the past 5 years.  The stock has quadrupled in that time, going from a $1.25 billion market cap to a $5 billion market cap company.  That’s larger than the vast majority of American restaurant chains, and an indication of impressive growth.  The stock has stalled in the past 18 months because expectations got too high. Looking at valuation, they are still quite high.  If the U.S. consumer is indeed weakening, PNRA stock could be quite vulnerable with slowing growth but a full multiple.