This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Potbelly Sinks as Report Says Stock 'Grossly Overvalued'

NEW YORK (TheStreet) - Potbelly (PBPB - Get Report) shares sunk significantly in trading Monday following a report over the weekend that called the stock "grossly overvalued."

Following Potbelly's IPO earlier this month, a Barron's article on Oct. 12 made the case that the sandwich shop's metrics do not support its high valuation. The author revised his thoughts on Potbelly's stock, calling the stock "grossly overvalued" after initially calling the stock "richly valued."

"The Midwestern mid-priced sandwich-shop chain actually trades at a sky-high 114 times trailing earnings, not the rich 36 times we warned about," the article said.

"Relative to its history of growth or what's reasonable to expect in the future from a small restaurant chain, the valuation seems astronomical," the article said.

Must Read: January 2016 Options Now Available For Pharmacyclics (PCYC)

Earlier this month, the 288-store chain priced 7.5 million shares in the public markets at $14 a share, above the expected range. Potbelly shares rose an impressive 120% on Oct. 4, their first day of trading, closing at $30.77 as investors gobbled up what some believe could be the next Chipotle (CMG) in the fast-casual sandwich space.

Including its overallotment, Potbelly ended up selling 8.62 million shares through the IPO, receiving net proceeds of $108.8 million, the company said on Oct. 9.

However, Potbelly previously disclosed in its registration filing with the Securities and Exchange Commission that $49.9 million would be used to pay out an immediate cash dividend to investors, which included a venture capital fund started by Starbucks (SBUX) founder Howard Schultz. Another $14 million would be used to repay borrowings and for working capital and other general purposes, Potbelly said. That leaves about $45 million in proceeds from the offering.

Since Oct. 4, the stock has pulled back for the most part. Shares were down an additional 4.5% on Monday to $26.56.

The Barron's report pointed to Potbelly's 2012 net income, which actually fell slightly year over year to $7.15 million when you take out a tax benefit. Net income also declined in the first half of this year, the article noted.

In another instance, revenue growth was about 12% in the first half of 2012, lower than the 15.5% growth experienced in 2012. While double-digit revenue growth is still good, it's "not enough for triple-digit valuation."

On the other hand, the article pointed to the bullish case for the stock -- a 28% increase in income before taxes for the first half of 2013 and franchise possibilities, even though the company is planning conservative store growth of 10% a year and has said, at least in the near term, it plans to do "disciplined" franchising.

"Potbelly shareholders who bought the highs after the IPO could soon suffer indigestion. Its fair value probably lies closer to the IPO price than its current level," the article stated.

-- Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
PBPB $10.16 -0.20%
FB $101.02 1.50%
GOOG $685.06 1.00%
TSLA $143.08 -3.50%
YHOO $27.12 1.10%


Chart of I:DJI
DOW 15,904.98 -109.40 -0.68%
S&P 500 1,859.57 +7.36 0.40%
NASDAQ 4,306.9410 +38.1780 0.89%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs