Is Potbelly Going Belly Up?

Potbelly(PBPB 1.13%) has many competitors in the private sandwich market that include private companies Quiznos, Jimmy John's, and Doctor's Associates, which owns Subway. As for public companies, Potbelly competes with Panera Bread Company (PNRA), Chipotle Mexican Grill (CMG 6.33%), and increasingly McDonald's Corp. (MCD -0.42%) as the famous burger and fries chain turns to healthier options.

Potbelly's shares fell 25% on July 10 after the company reported preliminary financial results for its 2014 second quarter and issued muted guidance for the rest of 2014. Including prior declines, the stock has now lost more than half of its value in 2014 alone:

PBPB data by YCharts

Panera has also declined significantly (by about 17%) in 2014, but not nearly to the extent of Potbelly's almost 55% decline. McDonald's has realized a modest uptick, and Chipotle has enjoyed a healthy increase of over 12% in 2014.

Potbelly's uninspiring guidance and depressed results
Potbelly's management made a number of revisions to its second-quarter and full-year outlooks. The company's management now believes it will report adjusted earnings per share of only $0.06, while analysts had expected $0.12. The lower EPS will partially result from lower revenue, as the company now expects revenue of $83.6 million or about $3 million less than the consensus estimate of $86.7 million. Potbelly's management also cautioned that its company-operated stores would see their sales decline 1.6% in the quarter and come in flat at best for the year .

Adding to its woes, the company's management now believes that Potbelly will produce far less earnings in 2014 than it previously foresaw. Management now expects EPS of between $0.18 and $0.21 for all of 2014 compared with a prior estimate of $0.43 to $0.46, so it effectively cut its earnings estimate in half.

Is the decline an opportunity?
The decline in Potbelly's stock could be an opportunity to pick up an investment on the cheap. So how does Potbelly compare to its competitors on a valuation basis?

Data Sources: Yahoo Finance & Morningstar

Potbelly has no earnings on a trailing-twelve-month basis and is quite expensive considering earnings estimates that look forward twelve months. Its forward P/E of 26.8 is certainly not a bargain for a company that is not growing as quickly as previously forecast by management and analysts. Panera or McDonald's both look like better buys than Potbelly considering their forward P/E ratios.

All of the companies seem quite expensive looking out five years and considering analysts' estimates for their earnings over that time-frame--except for Panera with a five-year PEG of 1.2, which puts it closer to fair valuation territory. Potbelly's five-year PEG of 2 looks expensive for the same reason as its forward P/E: depressed growth.

Interestingly, Potbelly looks like a solid investment on a P/CF basis with a P/CF of 8.4, which is a discount to the S&P 500's P/CF of 11. Panera and McDonald's are not far behind but Chipotle looks expensive on a cash-flow basis with a P/CF of 32.5, which is almost four times the valuation of Potbelly on a cash-flow basis.

Is Potbelly finished?
Potbelly is not going out of business and although its growth estimates have fallen dramatically, the sandwich maker will post a profit for the second quarter and most likely for the year. Its valuation multiples on an earnings basis do not appear overly attractive, but its low P/CF multiple is attractive to investors who are looking for cash flow and gives hope to investors who are looking for Potbelly to use its cash for expansion. Nonetheless, investors should closely monitor investments in Potbelly to see if the company can return to rapid expansion and generate enough earnings to grow into some of its valuation ratios.