Home > Stock Market Buys > B BAGL @ $10.12(BAGL, SBUX, PNRA)

B BAGL @ $10.12(BAGL, SBUX, PNRA)

I originally bought into Einstein Noah Restaurant Group (BAGL) on 10/21/09 for $13.19 after it had been running against a longer term 61.8% line which seemed bullish to me because the bears hadn’t been able to push it back down. I also liked them on a valuation basis because they compete with the likes of Starbucks (SBUX) and Panera Bread (PNRA) who are each fetching P/E’s more than twice as big as BAGL’s.

I sold about 2/3 of my position at $11.63 because the chart was breaking down. It proceeded to fall another 14% all the way down to $10 where I bought all my shares back for the discounted price of $10.12. They have revenue per share of $25 which compares to $44 and $13 for Panera Bread and Starbucks respectively. At the time of this writing, Starbucks is trading at a price to revenue per share ratio of 1.7 and Panera is trading at 1.4. Einstein Noah looks very good here with a ratio of just 0.4. They also are the best in terms of book value and price/sales.

I ran a discounted cash flow on Einstein Noah using the following values and it was undervalued under all of the circumstances. In an absolutely horrible situation, I think they could fall into the $8’s but in a best case scenario they could hit $25.

1.) Conservative Projection

EPS: 1
Projected 5yr EPS Growth: 10
Terminal Growth Rate 4
Discount Rate: 12
Book Value/Share: -1
Price: $11.94 (10.6% Upside)

2.) Semi-Optimistic
EPS: 1.25
Projected 5yr EPS Growth: 15
Terminal Growth Rate: 4
Discount Rate: 10
Book Value/Share: -0.5
Price: $21.44 (98.7% upside)

Now before you get all excited, there are some risks though. Einstein Noah only has $11M in cash and is carrying $117M in debt. Their current ratio is .52 and they had negative total net assets to the tune of $10.5M in the most recent quarter although net common shareholder equity went positive for the first time in 2009. However, all of these negative issues have been improving of over the last couple of years and I think the low valuation more than accounts for the problems.

– Michael J. Burns

Disclosure: Long BAGL

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