Berko: Potbelly Sandwich stock overpriced?
Friday, December 27, 2013 7:00 AM
Dear Mr. Berko:
In October, Potbelly Corp. went public at $14 and immediately ran to $34. I think their sandwiches are fantastic (there are several locations in Minneapolis), and I think the stock could run to $200 a share, just like Panera Bread that operates a similar concept restaurant. So my broker convinced me to buy 300 shares at $33.25, and while the stock market was making new highs, my stock has fallen to $28 a share. Did my broker make a mistake? If I had waited just a week later, I could have bought it at $24 – almost 10 points less than I paid for the stock.
No, your broker didn’t make a mistake; you did. And by all measures of common sense, a billion-dollar market capitalization (29 million shares at $33) for a cute little sandwich operation with $300 million in revenues and zero earnings is an obscene investment. Can you imagine how many sandwich joints there are in Minneapolis with similar menus to Potbelly (PBPB-$25.72) that peddle turkey, ham and cheese, roast beef and Italian sandwiches, baked goods, smoothies, shakes, sodas, soups, salads and chili? And can you imagine how many sandwich joints in the continental U.S. that produce a similar product that’s just as good or better? PBPB has warm, comfortable, pleasant ambience, but cheese and crackers got all muddy, this outfit with 300 locations, $300 million in revenues and possible earnings of 30 cents a share in 2014 ain’t, by no reasonable means, worth 85 times earnings. That doofus-dumb PBPB stock price is a result of the Federal Reserve force-feeding hundreds of billions of new $100 bills into the arms of the investment banking industry rather than job creation industries. So now there’s an oversupply of money chasing an undersupply of common stocks, and the result is something akin to tulipmania or a financial bubble.
PBPB’s operations model resembles Panera Bread, with friendly folks behind the counter making your sandwich, ladling your soup and tossing your salad. And PBPB’s easy neighborhood ambience resembling the theme of Cracker Barrel with 1900s decor (stoves, antiques, lighting, flooring) is also a nice touch. However, while imitation is the finest form of flattery, the comparisons end there. The first PBPB opened in Chicago in 1996 and the victuals and vittles were excellent. Over the following 17 years, management opened another 299 neighborhood locations, and according to my daughter, who practices law in Phoenix, their soups, sandwiches and shakes rate a gold star. While the stock was white hot, knowledgeable observers reckon that consumers don’t have enough wiggle room in their take-home pay to support continued growth, and recent months have seen some softness in this sector. The reasons are simple: (1) Consumer take-home pay is lower today than it was seven years ago. (2) Increasing food costs will force menu prices to rise. (3) Higher real estate taxes, higher insurance costs and rising power bills will weaken margins. (4) The rollback of food stamp benefits will crimp discretionary spending on casual dining. (5) The looming individual mandate to purchase health insurance under the Affordable Care Act next year will decimate the consumer’s budget. (6) The push for a $15 minimum wage will cripple profits. This a massive concern to the fast casual dining industry such as Jimmy John’s Subs, Sweet Tomatoes, Chipotle Mexican Grill, Einstein Noah, Five Guys as well as big retailers like Wal-Mart, Ace Hardware, Nordstrom, Foot Locker, etc. So new Federal Reserve Chairman Janet Yellen has to keep the money flowing to stop the consumer from slowing. But slow the flow and the market begins to move low.
PBPB may move higher, because there’s oodles of money and most of the good stocks have already been bought. Never in the history of this nation has so much cash been dump-trucked into the stock market. Potbelly may open 40 some stores in the coming dozen months, so revenues will increase and PBPB should have a positive earnings report late this year. However, I feel the price, between $25 and $34, reflects the value three to five years hence, if revenues and earnings grow as management hopes.
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