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.
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.