When comparing restaurants, using operating margin makes more sense than gross margin because each company’s product specialization can make gross margins vary widely. For instance, Chipotle Mexican Grill, Inc. (NYSE:CMG) relies on beef and chicken, Buffalo Wild Wings relies even more heavily on chicken pricing, and BJ’s uses pizza ingredients. Panera’s more diversified menu should be a benefit to the company if cost inflation occurs, because it doesn’t have to worry that one or two input costs will destroy its margins.
That said, Chipotle Mexican Grill, Inc. (NYSE:CMG) outperformed Panera in its most recent quarter, reporting an operating margin of 17.9%. However, if we compare Panera to Buffalo Wild Wings and BJ’s Restaurants, you can see the company’s margins are very respectable. Panera reported an operating margin of 14.17% compared to 7.88% at Buffalo Wild Wings, and just 5.7% at BJ’s.
When it comes to cash flow, Chipotle performed relatively better than its peers, but Panera finished a respectable second. Using core free cash flow (net income plus depreciation minus capital expenditures) helps to even the playing field when comparing companies by eliminating accounting changes that are not real cash. Taking this a step further, comparing core free cash flow to revenue reveals the company that is the most efficient at squeezing free cash flow from each dollar of revenue.
Using this formula of core free cash flow per dollar of sales, we find that Chipotle generated $0.16 of free cash flow in the most recent quarter from every dollar of sales. Panera generated $0.06 using this same calculation, while Buffalo Wild Wings generated $0.03, and BJ’s actually produced negative core free cash flow.
Why not just buy Chipotle?
Some of you might be thinking right about now: Why not just buy Chipotle? Given that the company has the best same-store sales of the group, the best operating margin, and the best relative free cash flow generation, this is a fair question.
The main problem with buying Chipotle at today’s levels is that the stock already appears to be priced as though Chipotle’s dominance will continue. With shares selling for more than 38 times projected earnings, and analysts calling for about 20% EPS growth, the stock sells for about 1.9 times its growth rate. Relatively speaking, both Buffalo Wild Wings and BJ’s Restaurants seem to offer a better value than Chipotle. Both companies sell for about 30 times earnings, and are expected to grow EPS by about 18% over the next few years. With both stocks selling for about 1.67 times their growth rate, it seems investors are getting more for their money.
That said, Panera seems like the best value of the bunch. The company sells for less than 25 times projected earnings, yet is expected to grow by about 17.5%. This means investors are paying about 1.43 times the company’s growth rate, even though Panera is expected to grow just slightly slower than its peer group. Given that Panera is generating strong same-store sales, has the second-best operating margin and free cash flow generation, it seems this recent pullback is just another buying opportunity for long-term investors.
The article This Pullback Is Just Another Opportunity originally appeared on Fool.com and is written by Chad Henage.
Fool contributor Chad Henage has no position in any stocks mentioned. The Motley Fool recommends BJ’s Restaurants, Buffalo Wild Wings, Chipotle Mexican (NYSE:CMG) Grill, and Panera Bread. The Motley Fool owns shares of BJ’s Restaurants, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread.
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