Restaurant Stocks – Not on the Value Menu: Panera Bread Co (PNRA), Starbucks Corporation (SBUX)

Starbucks’ store count is taking on resurgence despite more than 18,000 locations.  The company’s Asian growth story is taking hold with 11% same-store sales growth in the most recent quarter.  The acquisition of Teavana Holdings, Inc. (NYSE:TEA) also supports sustainable expansion opportunities.   Starbucks appears to have the best growth story having gained traction overseas along with opportunistic acquisitions.  Chipotle appears to be inevitably slipping down the mountain peak.  At some point they may have a good international story, but this will come years down the road and potentially after a notable compression in valuation multiples.

Risk 4:  Stock Valuations Ignore Above Risks

The chart below depicts the trailing twelve month price-to-earnings ratio for several restaurant stocks.

CMG PE Ratio TTM data by YCharts

All of these stocks seems rich from a valuation standpoint.  The Cheesecake Factory is the cheapest of the bunch, but 18x trailing earnings seem high given limited growth opportunities and zero economic moat.  It seems appropriate that Chipotle has a higher multiple than Panera Bread, but both bake in a lot of rosy forecasts in years 2013 through 2015.  Starbucks has the best fundamental story at this point, but 30x earnings makes shares a risky proposition.  All of the stocks offer investors little margin of error should any of the above risks materialize.

The Foolish Bottom Line

Restaurant stocks are too risky at this junction for long-term investors.  They have benefitted from a perfect storm during the last four years, but these tailwinds will begin subsiding in the next several quarters.  And this doesn’t take into account the fickle consumer that can change their preferences seemingly overnight.  Fundamental headwinds and rich valuations imply investors avoid this industry in 2013.

The article Restaurant Stocks – Not on the Value Menu originally appeared on Fool.com and is written by Justin Carley.

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