Shares of Panera Bread (PNRA) are up 20% from the 2015 lows, and nearly 5% on the year despite Wall Street analysts expecting the company to post it second consecutive earnings decline (down 5% yoy) and sales growth of about 6%.
The one year chart of PNRA looks like that of a stock of a company who has agreed to be taken over at a set price, with a huge volume gap, and the stock flatlining since:
Prior to the massive gap lower on a downgrade to 2015 guidance, the stock was finding fairy staunch technical resistance at $180. But then in mid April, when the company announced that they would be selling stores to franchisees and taking on debt to buy up to $500 million worth of stock in the next year, the stock blew through that level. Since, what was once resistance now becomes support, the stock has held the $180 level very nicely.
Taking a slightly longer term view, $180 remains an important technical resistance level:
Back in February the company cited “business investments, higher medical costs and increased minimum wages” for the expected decline and earnings and margins, but the real question has the bar been set low enough as few of the headwinds listed are likely to abate anytime soon.
My View: PNRA is not exactly cheap trading at 29x declining earnings growth, but when you consider PNRA’s market cap of $4.9 billion, trading less than 2x their expected $2.7 billion of 2015 sales, it could be viewed downright cheap vs another restaurant stock like Shake Shack’s (SHAK) $2.45 billion market cap on only $170 million in expected sales.
The next identifiable catalyst for PNRA will be Q2 results expected in late July (not confirmed yet), and a beat and raise, coupled with the tailwinds of the share buyback, means the stock will likely make new all time highs near $200. But a miss of already lowered guidance and a further tweak lower and the stock is back between $170 and $160, the consolidation prior to buyback announcement gap.
I have no particular view at the moment on fundamentals of the company, but despite only 26,000 in total options open interest (10,000 calls and 16,000 puts) options prices seem fair, to possibly cheap, with 3o day at the money implied vol at only 18%, a few ticks off of the all time lows:
That implied vol is reflective of a stock that’s been going sideways. But that won’t last forever and for those looking to position for the next move options could be the way to play.
Hypothetical Bullish/ or Stock Alternative
Buy the PNRA (183) August 180 calls for 8.50
Rationale – this caps the potential losses into earnings to 8.50 (less than 5% of the underlying) while allowing for unlimited upside participation in case of a break out to new highs.
Hypothetical Bearish / or Hedge vs long stock
Buy the PNRA (183) August 180/160 put spread for 4.50
– Buy 1 Aug 180 put for 5.50
– Sell 1 Aug 160 put at 1
Rationale – vol is cheap and now is the best time to put on a trade like this leading into earnings in August. If you wanted to keep the protection unlimited you could hold off on spreading this and simply have the 180 put for 5.50 and either keep it that way into the event or spread on weakness to perhaps an even lower strike than 160.