Panera Bread – When News of a Take-Out at a Premium is Bittersweet
As we reflect on the announcement that Panera Bread, a holding in several of Pender’s funds, is about to go private thanks to a takeover by European holding company JAB, we are left feeling somewhat bittersweet. While this development is probably perceived as terrific news by most market participants, we believe some investors with a longer time horizon may feel differently. So why would the take-out of Panera, at a decent premium, be less-than-ideal news?
On the other hand, ongoing business momentum, when also under-appreciated by investors, is the catalyst for “compounder” stocks. Interestingly, if you excluded all “compounders” out of the stock market indices over time, the benchmark returns would be close to zero. Logically, the stock market can’t go up much if it consists primarily of mediocre companies that are unable to grow their business value over time. The stock market goes up over time because the returns of compounders more than offset the anchor created by the much larger group of run-of-the-mill firms in the market. Following through on this line of reasoning, Charlie Munger was clearly referring to compounders when he opined “The big money is not in the buying and selling … but in the waiting”. Historically, Panera has been a compounder. The stock vastly surpassed the market because its business value compounded at a very high pace, but this was not fully appreciated by investors who undervalued the stock. We expected this track record to continue.
Still, PNRA has provided a very satisfactory return since we first started accumulating shares in late 2013. If we sold our stake today, we estimate the IRR of our PNRA investments would be about 20% annualized vs 11% for the S&P500 (note the return would be even higher if measured in CAD). The good news is that Panera was a high conviction “best idea” for Pender – it is the largest holding in both the Pender Value Fund and Pender US All Cap Equity Fund so it has definitely moved the performance needle in a positive way. Panera was a gem. We thank Panera founder/CEO Ron Shaich and his team for their superlative performance and wish them much luck with JAB. We are now tasked to find a replacement for PNRA…
As a final word on investing in compounders, we are reminded of a quote by investor George F. Baker. To make money in stocks you need “the vision to see them, the courage to buy them and the patience to hold them.” We would only add that patience is the rarest of the three.