timmerjames Posted January 21, 2014 Share Posted January 21, 2014 I started a position in Potbelly and wondered if anybody has any thoughts on the company? They seem to have very good store economics - $600k build out and looks like about $1M revenue per store with nice margins. Schultz of Starbucks owns about 30% of the company and the CEO Alywin Lewis has experience from YUM! and 26 years in the restaurant industry. They've been here in the DC area for a number of years so I've been a fan of their product and prices. Link to comment Share on other sites More sharing options...
jschembs Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? Link to comment Share on other sites More sharing options...
gg Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? +1 Link to comment Share on other sites More sharing options...
Kraven Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? +1 What does that even mean? If someone has an idea and can make a case for why it's worth more than it's currently selling for, then that would seem to be a worthwhile contribution. I am not sure the OP did that, but he put up an idea in a respectful, if incomplete, way. I don't see an issue here. If something is cheap however one wants to define it, I would like the opportunity to think about it. Link to comment Share on other sites More sharing options...
fareastwarriors Posted January 21, 2014 Share Posted January 21, 2014 I agree it is not cheap on traditional value sense but there is a lot of value in the business itself. Besides there are many topics in the investment thread about high multiple companies. I can't tell you anything about the financial statements but the company sells good stuff. I wish I can get some here in the West Coast. mmm Link to comment Share on other sites More sharing options...
timmerjames Posted January 21, 2014 Author Share Posted January 21, 2014 Thanks Kraven...I was just going to ignore the grumpy pusses. Go Denver! Link to comment Share on other sites More sharing options...
constructive Posted January 21, 2014 Share Posted January 21, 2014 They seem to have very good store economics - $600k build out and looks like about $1M revenue per store with nice margins Yet the market values it around $2.3M per store. I think opening a franchise makes more sense than buying the business. Link to comment Share on other sites More sharing options...
yadayada Posted January 21, 2014 Share Posted January 21, 2014 with valueinvesting you also have to be a fan of their low earnings or FCF multiple, besides being a fan of their products. Otherwhise your gonna have a bad time Link to comment Share on other sites More sharing options...
jschembs Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? +1 What does that even mean? If someone has an idea and can make a case for why it's worth more than it's currently selling for, then that would seem to be a worthwhile contribution. I am not sure the OP did that, but he put up an idea in a respectful, if incomplete, way. I don't see an issue here. If something is cheap however one wants to define it, I would like the opportunity to think about it. Sorry for the sarcasm; my natural reaction to a post about a sandwich shop trading > 3x revenue and > 30x EBITDA. Link to comment Share on other sites More sharing options...
Kraven Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? +1 What does that even mean? If someone has an idea and can make a case for why it's worth more than it's currently selling for, then that would seem to be a worthwhile contribution. I am not sure the OP did that, but he put up an idea in a respectful, if incomplete, way. I don't see an issue here. If something is cheap however one wants to define it, I would like the opportunity to think about it. Sorry for the sarcasm; my natural reaction to a post about a sandwich shop trading > 3x revenue and > 30x EBITDA. No worries. I guess it's what they say. Sometimes a sub sandwich is just a sub sandwich. They did have one great sandwich - the Wreck I think it's called. Link to comment Share on other sites More sharing options...
timmerjames Posted January 21, 2014 Author Share Posted January 21, 2014 Thanks constructive for the per store valuation. Obviously, on any metric (FCF, earnings, per store valuation) it's expensive. However, Chipotle went public in 2006 and it's IPO priced at $22 for 8 million shares but opened in the $40s and never looked back. They had 480 stores at the time with about $480M in revenue. Now they have 1500 restaurants and $3.2B in revenue. I've always made the mistake with a "value mindset" looking at some of these growth stocks and never investing. I don't think PBPB gets to CMG levels but if it achieves half its growth in the next 7 years in store count I think I'll be happy. It's a small starter position. Also, they aren't doing a whole lot of franchising. I think the plan is for mostly company owned stores with some small portion coming from franchising. Howard Schultz is someone I admire and even though he isn't the CEO, he is represented on the board. Link to comment Share on other sites More sharing options...
gg Posted January 21, 2014 Share Posted January 21, 2014 I thought this was a value investing board? +1 What does that even mean? If someone has an idea and can make a case for why it's worth more than it's currently selling for, then that would seem to be a worthwhile contribution. I am not sure the OP did that, but he put up an idea in a respectful, if incomplete, way. I don't see an issue here. If something is cheap however one wants to define it, I would like the opportunity to think about it. Sorry for the sarcasm; my natural reaction to a post about a sandwich shop trading > 3x revenue and > 30x EBITDA. I definitely understood the comment as sarcasm too, so apologies if the "+1" offended On tastes, I am personally a frequent customer at Potbelly, and it's one of my favorite places to grab a quick lunch. On the business front, I think they do one of the best jobs of integrating smart technology into the restaurant space (ordering online is pretty seamless, and when the lunch lines are long, they have employees with ipads taking orders so that once you get to the front, your sandwich is already through the toaster). I think those are very important for lunch places in metro areas to master, and Potbelly does a great job. In terms of investment, there's always a chance that it becomes the next Subway, but wouldn't be interested in paying for future growth assumptions. I live in Chicago, which is where Potbelly is from, and I consider the city to be quite saturated with stores. It doesn't mean they can't grow their way into the lofty valuation, but I don't think the stock is valued at a point where a conservative estimate of future growth would justify investment... As a total unimportant side point, at the Invest For Kids investment conference in Chicago this past fall, Leon Cooperman (Omega Advisors) mentioned that he owned PBPB stock for about 15 seconds. If I remember correctly, the IPO priced around 15 and began trading at 30. I always wondered who got to take advantage of the "free money" that the IPOing company and banks left on the table in the IPOs that skyrocket on the 1st day, and it was interesting to hear a fund manager so honestly admit that they essentially arbitrage their prime brokerage relationship... Link to comment Share on other sites More sharing options...
rogermunibond Posted January 21, 2014 Share Posted January 21, 2014 Can someone tell me the average ticket at PB versus Subway? What about similar concepts like Jimmie Johns? QSR is brutally tough so just wondering what makes PB stand out. I have noticed their customer base seems to skew younger. Link to comment Share on other sites More sharing options...
BTShine Posted January 21, 2014 Share Posted January 21, 2014 with valueinvesting you also have to be a fan of their low earnings or FCF multiple, besides being a fan of their products. Otherwhise your gonna have a bad time YadaYada, Not true IMO. If the company has enough room to grow (in this case, you could say they haven't saturated the market with only 286 shops in 18 states -- I could see them being 3X their current size. And they experience a high return on capital (Chipotle was seeing return on capital, after tax, of around 33% when I bought it in '09/'10) then you can buy a company for a high FCF multiple and see an exceptional investment return. FCF analysis must take into account where the current free cash will go and the expected return. Chipotle opening new stores at a cost of $1.2 million and expected after cash returns of around $400,000/year is a much different opportunity than using cash to buy back stock. As for PBPB, I've no idea of their internal metrics, but CMG has shown me that not all FCF ratio's are created equal. Link to comment Share on other sites More sharing options...
Guest deepValue Posted January 21, 2014 Share Posted January 21, 2014 It's always tough to imagine a future that looks really different from the past. We did a lot of that at the hedge fund I used to work for; it never made sense to me, but some people can do it quite well, or well enough, in a diversified portfolio. Without knowing anything about Potbelly except that it's a sub shop, I find it hard to imagine it is going to grow into its valuation while competing against the world's largest restaurant chain (Subway). Link to comment Share on other sites More sharing options...
bz1516 Posted January 21, 2014 Share Posted January 21, 2014 With modest adjusted earnings guidance, very modest increases in SSS, a negative BV, an even more negative TBV, and a huge dividend paid out of offering proceeds, it certainly does not present as a value stock or a growth stock. Not a lot of room left to make a case for this company. Link to comment Share on other sites More sharing options...
peridotcapital Posted February 3, 2014 Share Posted February 3, 2014 I had a client ask me about Potbelly prior to the IPO, despite my value orientation. After looking at it I gave him a valuation range of 17-21 as an idea of where I would even start to consider it for his account (and I preferred the low end of that range) despite his positive inclination towards the company. I think it opened around 30 so that was that. Now its headed back to 22-ish. I can certainly understand why many on this site would not consider it if it did not trade at some kind of discount on some valuation metric. In order to give my client some helpful input I looked at it as a "growth at a reasonable price" play, and relative to other growth comps in the restaurant space. From that lens I felt okay at around 15x TTM EV/EBITDA. Obviously that doesn't scream "value" on the surface, but you can use reasonable growth and margin assumptions and justify it, if you like the company. It has traded above that because restaurant IPOs were scalding hot in 2013 with the likes of NDLS trading at 30-40x EBITDA, which was laughable. All of that is a long way of saying if you can get it under 20 I think you aren't paying too much if you like the future potential of the concept, but want to factor valuation into the equation as well, which buyers last year were clearly not doing. Link to comment Share on other sites More sharing options...
loganc Posted February 4, 2014 Share Posted February 4, 2014 With modest adjusted earnings guidance, very modest increases in SSS, a negative BV, an even more negative TBV, and a huge dividend paid out of offering proceeds, it certainly does not present as a value stock or a growth stock. Not a lot of room left to make a case for this company. How is book value a relevant metric to think about here? DTV has a negative book value - I guess I should sell. My view, which is probably worth very little, is that looking for value does not preclude looking at high multiple names. However, I think one has to be very cognizant of the fact that the QSR business is extremely competitive. It would be pretty hard for me to get interested in investing in this name when I can pay a high multiple for BKW, invest with 3G, and collect an extremely high margin royalty. Link to comment Share on other sites More sharing options...
wknecht Posted February 6, 2014 Share Posted February 6, 2014 I haven't seriously considered Potbelly as an investment. But one thing I've thought about is that I feel they have room to raise prices. Maybe its only around the touristy spot I work (Rockefeller Plaza in NY), but I feel it's one of the few places I can get a good sandwich for what I consider a reasonable price. If I recall, most of Potbelly sandwiches are around $5 and most other places are $7-8+. So I feel they could raise prices quite a bit and still be cheaper than places like Pret, Pax, Lenny's, Au Bon Pain, Toasties, Cosi, and many other sandwich places (maybe not Subway though). Not to mention other popular lunch places like Chipotle. Just a thought. Link to comment Share on other sites More sharing options...
CorpRaider Posted February 19, 2014 Share Posted February 19, 2014 Another couple of days like this and it might be in the same zipcode as your rational price, Peridot. Link to comment Share on other sites More sharing options...
A Dhandho Investor Posted February 20, 2014 Share Posted February 20, 2014 Hedgeye Restaurants Analyst Howard Penney explains why Potbelly—one of his Best Idea SHORTS—is still wildly overvalued, even after getting hit following an earnings miss: http://app.hedgeye.com/media/814-video-pbpb-why-potbelly-is-still-wildly-overvalued Link to comment Share on other sites More sharing options...
peridotcapital Posted February 21, 2014 Share Posted February 21, 2014 Hedgeye Restaurants Analyst Howard Penney explains why Potbelly—one of his Best Idea SHORTS—is still wildly overvalued, even after getting hit following an earnings miss: http://app.hedgeye.com/media/814-video-pbpb-why-potbelly-is-still-wildly-overvalued Well if you look at it from a P/E basis like that guy did, then yes, its grossly overvalued. I think you have to use cash flow multiples though, given the noise in GAAP reported EPS. In the mid teens it's a more than fair price if you like the company. Doubt I would jump in even then, however, since I already have a full plate of restaurant stocks I like better. Interesting one to watch though. Link to comment Share on other sites More sharing options...
PatientCheetah Posted May 8, 2014 Share Posted May 8, 2014 Any thoughts on the quarter? I think the main problem with the business is that it just doesn't have much per store operating leverage and margins to grow quickly - fairly losey same store comps consistently in its history. It is using all of its FCF to open new stores which limits store growth to 10-15% a year. Howard Schultz has a large say on the board so aggressive franchising is out of question. Maybe worth a look if stock goes to $8-12 or 10-15x EBITDA. I wonder what the earlier days were like for Starbucks but coffee does have much higher margins and is a legal drug. I really like PBPB's sandwiches - wreck with everything! Link to comment Share on other sites More sharing options...
peridotcapital Posted May 10, 2014 Share Posted May 10, 2014 Any thoughts on the quarter? I think the main problem with the business is that it just doesn't have much per store operating leverage and margins to grow quickly - fairly losey same store comps consistently in its history. It is using all of its FCF to open new stores which limits store growth to 10-15% a year. Howard Schultz has a large say on the board so aggressive franchising is out of question. Maybe worth a look if stock goes to $8-12 or 10-15x EBITDA. I wonder what the earlier days were like for Starbucks but coffee does have much higher margins and is a legal drug. I really like PBPB's sandwiches - wreck with everything! 10x 2014 EBITDA would be about $13.50/share. That would be the most I would likely pay for a 10% unit growth story (interestingly, the IPO price was $14.00). Unless run terribly, these kinds of restaurants tend to have pretty stable, predictable business models and you will get some operating leverage as they grow (from SG&A mostly, not four-wall margin). Link to comment Share on other sites More sharing options...
petey2720 Posted July 10, 2014 Share Posted July 10, 2014 Thank you to Timmerjames for putting this on our radar screen. Thank you to jschembs for pointing out that it was selling for 3 x revenue. Please note that it is now selling alot closer to 1 x revenue. Link to comment Share on other sites More sharing options...
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