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This Fresh Restaurant IPO Is Worth a Look

Potbelly (NASDAQ: PBPB  ) came to the market in October of this year, and the company has become a hot topic of discussion in the quick-service restaurant industry. The stock soared in its first day of trading, which made those who participated in the IPO very happy and allowed the company to raise a large amount of capital. Potbelly released its first quarterly report a few weeks ago, so let's take a look and see if we should buy it now or if we should hold back and wait for the stock to come down a few points. 

The sandwich chain
Potbelly owns and operates Potbelly Sandwich Shops. Its products include sandwiches, soups, salads, and shakes, all of which are made fresh to order. The company's vision is to become "The Best Place for Lunch" in every market where it opens a location. There are currently 307 locations in 18 states, the District of Columbia, and the Middle East. Potbelly was founded in 1977 and went public in October of this year.

Recent results
Third quarter earnings were released on Nov. 12, and the results exceeded analyst expectations on both the top and bottom lines. Here's a summary of the report:

Metric Reported Expected
Earnings Per Share $0.15 $0.09
Revenue $78.00 million $77.88 million

Earnings per share increased 25% and revenue rose 11.7% year-over-year. Comparable-restaurant sales grew 2.5%, and the company's adjusted net income rose an impressive 26.7%. Nine new locations were opened during the quarter, including eight company-owned restaurants and one franchise. Clearly Potbelly started off on Wall Street with a bang. I believe this is just the first of many reports that will exceed expectations, as Potbelly's great product mix will continue to drive customer traffic.

Potbelly also updated its guidance for fiscal 2013. The company predicts net income of $7.5 million-$8.1 million, in-line with the consensus annual earnings per share estimate of $0.39. Revenue is expected to come in around $300-$303 million for a rise of about 9.7% from 2012, with comparable-restaurant sales growth in the low single-digits. The company expects to open 40-42 net new locations during the year, which would mean 11-13 locations will open in the fourth quarter. These are great results for Potbelly's first year as a public company. I expect Potbelly to announce strong guidance for fiscal 2014 when fourth quarter results are released in February. 

The chief's comments
In the earnings report, Chief Executive Officer Aylwin Lewis was very happy about the company's performance. Here are two of the most notable comments he made:

"This was our first quarter of reporting as a public company and it was important that we achieved the growth results in line with our long-term targets... Additionally, as a result of our IPO, we have significant excess cash to fund our growth."

"We view the IPO as a significant milestone, but not a destination. Our focus remains on operating the business and delivering long-term shareholder value." 

These two comments show that growth is the primary vision, which is exactly what we want to see in a quick-service restaurant chain like Potbelly. The company has just over 300 locations, but I believe it can grow to over 500 in the next five years if the company can execute and expand in a controlled manner. 

Competing sandwich company
Panera Bread (NASDAQ: PNRA  ) is one of Potbelly's largest public competitors in the sandwich and soup industry; however, the two companies have very few locations in close proximity, so the competition is not as direct as it may be with other restaurant companies.

Panera reported third quarter results on Oct. 22, in which earnings grew 19.4% and revenue increased 8.2%. Earnings per share were in-line with analyst estimates, but revenue came in much lower than expected. To make things worse, the company also lowered its fourth quarter guidance because it expected weak comparable-store sales. The stock took a hit after the report and has not shown much strength since. I want to stay away from this one for now and wait to see what management has to say in its fourth quarter report. 

The Foolish bottom line
Potbelly has the potential to become the next great quick-servce restaurant chain. It has shown financial strength and boasts a veteran management team who knows what they need to do to maximize growth. The stock is trading more than 17% below its 52-week high and I believe it could easily push back toward its highs over the next few months. Take a look and see if your portfolio could use a high-growth restaurant company like Potbelly.

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9/27/2016 4:00 PM
PBPB $13.01 Down -0.04 -0.31%
Potbelly CAPS Rating: **
PNRA $193.51 Down -1.88 -0.96%
Panera Bread CAPS Rating: ****