Panera Bread Company (PNRA) moved substantially higher on Wednesday after the company reported that its earnings per diluted share rose by 17.4 percent during the quarter ended June 30, 2014, as compared to the prior quarter.

At first glance, that earnings per share (“EPS”) increase appears to be very impressive.

However, a closer review of Panera Bread’s second quarter operations reveals that the company did not perform as well during the three months ended June 30 as its EPS implies.

Before discussing the company’s operating results, let’s review some general information about Panera Bread.

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Company Description

Panera Bread operates 1,818 bakery-cafes, including approximately 925 franchise restaurants, in 45 U.S. states and Ontario, Canada. Since its founding during 1981, the company has grown from serving approximately 60 customers per day to more than 1 million customers per day.

Panera Bread’s restaurants offer high-quality food and beverages in warm and welcoming environments that feature comfortable gathering areas, relaxing decor, and free Internet access. Its bakery-style cafes are located primarily in urban and suburban strip malls.

The company’s offerings, which are rooted in its handcrafted and freshly-baked artisan bread, include a variety of freshly-baked bagels, muffins and scones; made-to-order sandwiches using a variety of freshly-baked breads, including Asiago cheese bread, focaccia, and sourdough bread; chicken raised without antibiotics; unique soups; freshly-prepared and hand-tossed salads made with fresh-from-the-field romaine lettuce and tomatoes; pasta dishes; and roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino.

In addition to its restaurants, Panera Bread operates 24 facilities throughout the United States and Canada to supply its restaurants on a daily basis with fresh dough, tuna, cream cheese and produce. The company distributes its fresh dough and produce through a leased fleet of approximately 220 temperature-controlled trucks.

Panera Bread’s bakers bake the company’s bread throughout every day and night in an effort to provide its customers with the highest quality and freshest bread possible.

The Kirkwood, Missouri-based company’s restaurants have been rated by Health Magazine and Zagat as North America’s healthiest quick-casual restaurant chain. Zagat has also rated Panera Bread as having the Best Salad and Best Facilities for restaurants chains having fewer than 5,000 locations.

The company operates under the Panera Bread, Saint Louis Bread Co. and Paradise Bakery & Café trademark names. It was founded during 1981 as Au Bon Pain Co. and went public during June 1991.

Revenues and Earnings

Although Panera Bread has grown at a fast rate since its founding more than 30 years ago, the company’s revenue and earnings growth slowed considerably during 2013.

Specifically, the company’s revenues rose at a year-over-year rate of only 12 percent for the year ended Dec. 31, 2013, after rising by 16.9 percent during 2012 and by 18.1 percent during 2011. And, the company’s net income rose by only 13.1 percent during 2013, after rising by 27.6 percent and 21.8 percent during 2012 and 2011, respectively.

While the company’s earnings per diluted share rose by 17.4 percent for the quarter ended June 30, 2014, as compared to the prior quarter, its earnings per share rose by only 4.6 percent compared to the same quarter a year ago. Meanwhile, the company’s revenues rose by a paltry 4.2 percent, on a sequential quarterly basis, and by only 7.1 percent, on a year-over-year basis, for the quarter ended June 30, 2014.

Even more discouraging is the fact that Panera Bread’s earnings per share rose during the quarter ended June 30, 2014 because the company bought back substantial shares of its publicly-traded stock over the past 12 months. If the company had not made those stock buybacks, its earnings per share would have declined by approximately 3.6 percent during the quarter ended June 30, 2014.

Stock Valuation

While Wednesday’s big jump in Panera Bread’s stock indicates that financial market participants are optimistic about the future direction of the company’s operations, my research indicates that Panera Bread’s recent operating results don’t support Wednesday’s 3.5 percent rally in PNRA.

For example, the company’s net income fell by 3.6 percent and 11.9 percent for the quarters ended June 30, 2014 and March 31, 2014, respectively, indicating that its net income for the full year ending Dec. 31, 2014 will also decline or rise at a slower pace than it did during 2013 – at a year-over-year rate of less than 12 percent.

Yet, the company’s stock closed on Wednesday at a price-to-earnings (P/E) multiple of 22, or $151.76. That P/E ratio indicates that Panera Bread would need to increase its net income by an average annual rate of 22 percent over the next few years for the company’s stock to be fairly valued.

However, a different solution would be for the company to continue to buy back huge amounts of its common stock. And, that’s exactly what Panera Bread plans to do, with the company reporting on June 5 that its Board of Directors approved a new three-year share repurchase authorization of up to $600 million.

Unfortunately, my research indicates that even if the company were to purchase $600 million of its stock that its stock would need to still fall to around $100 per share for it to be fairly valued. Thursday, the stock fell $4.46, or 2.94 percent, to close at $147.30.

Frazier’s Investment Advice

Although my family and I visit Panera Bread’s restaurants on a regular basis, the factors and developments mentioned above indicate that Panera Bread’s stock isn’t nearly as appealing as the company’s food and beverage offerings. Therefore, I would advise stock market investors and speculators alike to ignore Wednesday’s rally in PNRA. Stay away from PNRA or sell it short if you’re an aggressive speculator.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.