Is Potbelly Worth a Bite?

For patient investors, one of the most rewarding experiences is realizing your prior apprehension regarding a particular investment was warranted. In my case, when popular sandwich shop Potbelly (NASDAQ: PBPB  ) went public in late 2013, the valuation seemed far too high and not at all worth the risk.

Sure, the stock soared 125% in the first few minutes of trading. But when I viewed the company as a long-term growth investment, what I saw was not at all enticing. However, with shares now sitting at 52-week lows, the time seems right to revisit the buy-and-hold case for Potbelly.

Source: Potbelly.

The 2013 restaurant trade
The timing of Potbelly's IPO made a great deal of sense. Last year, investors were craving new restaurant stocks, hoping to find the next Chipotle Mexican Grill (NYSE: CMG  ) .

Companies like Potbelly and Noodles & Company (NASDAQ: NDLS  ) both IPO'd to great fanfare in 2013. The initial hype was enough to double the share prices of both companies on their respective debut trading sessions.

However, the story has since been anything but a success. Potbelly and Noodles both fell swiftly and significantly from their lofty valuations, proving that hype alone does not last. What matters most is growth, and in this regard both restaurant companies have not been all that impressive.

Source: Noodles & Co.

The 2014 restaurant investment?
Like most things, stepping away from an investment can be a good thing. With Potbelly seemingly left for dead by most investors, savvy long-term growth investors can begin to consider the sandwich shop at drastically reduced levels.

To determine whether the company is worth investing in, it is helpful to compare Potbelly to other restaurant stocks. The following is a breakdown of Potbelly's projected growth in 2014 compared to that of Chipotle and Noodles:

Company Revenue Growth
2014
EPS Growth
2014
Chipotle 18.1% 23.5%
Noodles 16.4% 27.5%
Potbelly 11.3% 0%
 

There is a reason so many investors want to find the next Chipotle, and that's because it is still one of the best restaurant companies for growing revenue. The company is projected to lead all listed competitors in growing sales over the next year. On the other hand, Potbelly is expected to lag significantly behind both Chipotle and Noodles in terms of revenue growth, and its earnings-per-share growth is nonexistent. 

Unfortunately, when we consider valuation, Potbelly does not fare much better. The company's forward P/E of 38 is higher than Chipotle's 35.6 despite having vastly inferior growth prospects and a less powerful brand. However, Noodles remains the most expensive of the three by far, with a forward P/E of 54.7.

Sub-par performance
Not surprisingly, Potbelly's low growth projections have much to do with management's inability to grow comparable-store sales significantly. In the fourth quarter, company-owned stores grew sales at a paltry 0.7%. By comparison, Chipotle's fiscal fourth-quarter same-store sales increased by 9.3%. Noodles also fared better than Potbelly, growing same-store sales in company-owned stores 4.3%.

What could be the reason for this? The answer may be simple: Potbelly is not a strong brand capable of driving robust traffic at the moment. Chipotle offers a unique and hassle-free take on fast-casual dining, and Noodles offers overwhelming diversity through its worldly menu options. Potbelly simply offers sandwiches, salads, soups, and not much else. There is no differentiation between Potbelly and local sandwich shops, which means the company is lacking brand power.

Source: Chipotle.

Bottom line
While a drastically reduced share price can sometimes signal opportunity, this does not appear to be the case with Potbelly. The company is still struggling to grow, and this is most likely a result of weak brand power.

In the restaurant space, Chipotle is still the king of growth, and Noodles is not too far behind. Accordingly, there does not appear to be a good enough reason for investors to bite into shares of Potbelly.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 6:46 PM, Kummin wrote:

    I agree with most of the views in this article. What distinguishes Potbelly from any other sandwich shop out there? Nothing, I think. Another thing and I'm the only one pointing this out - Potbelly is a horrible name for a restaurant. Unless you also lean toward a chain of nightclubs with the name Face Down in the Gutter Passed Out. Good grief, how stupid can you get? Implying that regular visits to Potbelly's will give you - what? Why a pot belly of course. Stooooooopid.

    Noodles is a much better investment, at least the niche they're carving out for themselves is mostly vacant.

  • Report this Comment On April 06, 2014, at 8:48 PM, Dw1985 wrote:

    You fail to mention PBPB q4 and q1 were hindered by weather. The street knows this. Unit growth on track. By year end 365 units. Smart, calculated, sustainable growth. Not like Quiznos, it is about growth but calculated is the key word. The place already has a massive lunch following, product innovation and Backline sales will create higher SSS. The narrative can change quickly, be careful being short.

  • Report this Comment On April 07, 2014, at 11:19 AM, sandiegoman wrote:

    The recent jump is from William Blair upgrading the stock -- but wasnt WB an underwriter? Can anyone confirm that? I don't see any other banks upgrading anytime soon

  • Report this Comment On April 07, 2014, at 5:26 PM, WDHT84 wrote:

    I suggest you walk by a Potbelly at noon any day of the week in downtown dc and then walk by the nearest Subway. You will notice one has a line out the door and the other does not. I do not buy your brand power theory. Further comparing chipotle with Potbelly is comparing apples and oranges. How does it far compared to other sandwhich shops?

  • Report this Comment On April 14, 2014, at 2:37 PM, ATahiri2 wrote:

    Did McDonald's offer the world of restaurants something new as it grew through the 90's and early 2000's? Absolutely not. Really there is only one restaurant chain offering something different now, Chipotle.

    The fact that they serve sandwiches and aren't "different," therefore it's a bad investment, is an argument that only makes sense when you compare them to Chipotle. Subway only offers sandwiches and is the largest restaurant chain in the world.

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