Source:  Wikimedia Commons

Poor Potbelly Corporation (PBPB 1.87%). Here's a company that just wanted a humble IPO that it was expecting to fetch between $12 and $13 for and was surprised when it came in at $14. What shock the executives must felt when almost immediately after it sold its first shares to the public they began trading for nearly $34 per share. Since then, journalists and bloggers began attacking the valuation as it falls to lower and lower levels. Having come back down to Earth, Potbelly's shares trade just above their original IPO price. Which begs the question: at $15 per share, is Potbelly finally a buy?

A cast-iron company
There is nothing that seems wrong with the company itself, especially since it almost certainly had no clue the market would bid shares up over $30 per share so soon. The little sandwich company that longs hope will one day be the next Subway only has 300 restaurants and a lot of opportunity ahead of it. However, even at $15 per share, it may still have a ways to fall before the valuation becomes truly tempting.

Potbelly last reported results on May 6. Total revenue improved 7.5% to $73.9 million. Same-store sales slipped 2.2%. Adjusted net income did pop 128% to $0.2 million or $0.01 per share, but such tiny net incomes as a percent of sales are easy to show a large percentage gain without it being very meaningful.

Aylwin Lewis, Chairman and CEO of Potbelly, blamed the negative winter weather for having a 3.75% negative effect on same-store sales; otherwise, they would have been positive and presumably adjusted net income would have been much higher. Potbelly remains committed to opening between 40 and 48 new shops this year, which doesn't sound like much but on a percentage basis it's quite robust at well over 10%.

Potbelly is looking to expand its units by at least 10% annually "for the foreseeable future" along with low single digit same-store sales growth.

Inside the original PotBelly shop. Source: Wikimedia Commons

Growing like a weed, but not worth a diamond yet
Greater than 10% new units and same-store sales of say 3% or 4% could mean annual growth in the 15% or so range. There's no question that this is impressive, and if Potbelly can keep that pace up for years on end while operating with good margins then it may very well justify $34 and beyond. For now, though, it's still a tough pill to swallow.

At $15, Potbelly trades with a P/E of 44 based on analyst estimates of $0.34 per share for fiscal 2014. For fiscal 2015, it trades with a P/E of 33 based on estimates of $0.45 per share. If both earnings per share numbers are hit, this represents earnings growth of 32%; this makes the P/E of 33 look not too bad. Being such a new company to the public eye without much of a track record to examine, however, I'd prefer Potbelly's stock to lose a few dollars before I order up some shares.

How $34 and above could be justified
It's a good idea to keep an eye on Potbelly whether you like it or not because what may not be attractive today could become attractive in the future. If, for example, Potbelly is able to grow its sales by 15% more in 2016 as it seems planned and earnings per share are able to jump another 30%, then it could start to get interesting.

If the 15% sales growth and 30% earnings growth continues into 2017 and 2018, then we're up to nearly $1 per share in earnings and a P/E of 34 with a stock price of $34; this isn't an unreasonable P/E for a continuous fast grower like that. Is it impossible for Potbelly to achieve? Far from impossible. Am I betting on it right now here in 2014? I'll pass.

Source: Wikimedia Commons

Foolish takeaway
The speculative if's, maybe's, and perhaps' keep me watching Potbelly like a hawk. If it sheds a few pounds or reports better than expected numbers, then the story – and valuation – could change in a heartbeat. For now, the speculation is just that and shouldn't carry much fundamental value this early in the game. Let Potbelly trim some fat first.