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What earnings I’m playing today: PNRA and GD

October 25, 2011

Today, I will be shorting both PNRA and GD.

PNRA bit off more than they could chew with their Q3 guidance.

Why short PNRA?

Panera reports after the bell today (Oct. 25th). In the last four quarters, the company’s reported EPS exceeded Wall Street’s consensus estimates for quarters ended December 2010, March 2011 and June 2011, by margins of 3.40 percent, 1.90 percent and 0.90 percent.

For the third quarter, the company is expecting earnings per diluted share of $0.92 to $0.94, compared with $0.75 per diluted share in the third quarter of fiscal 2010. If the company meets this target, diluted earnings per share will grow 23 percent to 25 percent in the third quarter of fiscal 2011 versus the comparable period in fiscal 2010.

For the quarter ended September 2010, the reported EPS met Wall Street’s consensus estimate of $0.75 per share. PNRA has been beating estimates by increasingly small margins this year, and expectations are now very high for this stock, particularly after Chipotle continues to impress.

Why might I be wrong?

Chipotle operates in a similar market, $8-10 entrees, fancier than fast food, and recently cruised past earnings. If Chipotle is doing well, then so will Panera. They attract similar crowds, white collar people for lunch and dinner.

Why might the longs be wrong?

Expectations are very high for PNRA…to high in fact after Chipotle earnings. While Chipotle offers something unique – burritos with fresh ingredients at relatively low prices, Panera is in a sea of competitors. Given the less than optimal economic conditions of Q3, consumers would have been cutting back on expenses. This means going to Subway or Quizno’s for a somewhat cheaper sandwich than Panera. In short, Q3 guidance was too high and will finally surpass earnings.



Why short General Dynamics (GD)?

If you’re looking for an industry likely to be subject for reduced profit guidance, look no further than the defense sector. GD, a large government defense contractor and maker of private jet cabins, reports earnings before the bell Wednesday. Wall Street estimates for General Dynamics have been little changed thanks to the company beating expectations in each of the past four quarters. But given the likelihood of government spending cuts, General Dynamics might be at the end of a nice run. Wall Street expects General Dynamics to grow profits in 2012 by a very modest 5%. With GD shares trading for nine times current-year estimates, the stock is ripe for a 5%-plus reduction should future guidance disappoint.

Why might I be wrong?

The defense lobby is huge. Plus, there has been talk about large defense spending cuts for years with little to show for it.

Why the longs are wrong?

See here. Guidance will be the downfall of GD. Guidance will be conservative now, and the stock will bite the bullet now and shed 10% rather than shed 20% in Q1 2012 when big defense cutting legislation passes. GD is fairly diversified in terms of what it develops, and the planned defense cuts are across the board rather than sector-biased. Earnings will be fine but guidance will be weak.


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