Editor's Note: I'm pleased to present another report from contributor Galileo Russell. Since publishing his last article on DataWatch (NASDAQ: DWCH), the stock is up 24% in just two weeks (you can read his article The Best Big Data Stock to Buy - just click here).
Last week, I asked him to share another top investment idea with Daily Profit readers. Below you'll find his report on Potbelly. He delivered the article last week, and unfortunately I didn't publish it immediately. Potbelly was up 10% yesterday on strong earnings - confirming Galileo's bullish outlook for the stock. I think you'll enjoy his report.
Fast casual dining stocks have been one of the hottest sectors of the market throughout the past couple of years. With stocks like Chipotle Mexican Grill (NYSE: CMG) up 78% in 2013, and Noodles (NASDAQ: NDLS) soaring 139% following its IPO, it's clear that investors have an appetite for fast food stocks.
Recently, a small sandwich shop named Potbelly (NASDAQ: PBPB) went public in a well-received IPO. Not surprisingly, the stock soared 120% during the first day of trading.
Potbelly restaurants standout because of a cozy ambiance, local musician performances and most importantly, high quality toasted gourmet subs. The attraction for investors is the big growth opportunity. With just 300 locations today, the potential for expansion is considerable.
Just consider Subway, with over 23,000 locations in the U.S. If Potbelly can convince just a small portion of customers to embrace its higher quality subs, it could eat a big chunk of Subway's lunch. After all, a small Potbelly sandwich costs just $4.70, a bit less than Subway's famed $5 foot long promotion. This also shows just how much room Potbelly has to raise prices and position itself as a premium alternative.
In a recent SEC filing, Potbelly called for 10% annual store growth for the foreseeable future. That expansion of new restaurants should keep Potbelly's revenues growing in the double digits for at least the next three years.
Now trading at $30 per share, Potbelly is valued at $840 million. That values the company at roughly 3-times last year's sales. For a business with as much room to grow, this seems cheap. For comparison, fast-casual leader Chipotle trades at 6-times last year's sales.
-Jeremy Phillips, Motley Fool Chief Technology Officer It's growing faster than Apple, Amazon.com, and Google combined. And now I'm so confident that I'm investing 5X more than I ever have. I say we get rich together! Just click to discover my favorite stock!
I believe Chipotle is a great comparable for Potbelly's for two reasons. First, Potbelly is reinventing a fast-food concept into something more modern and doing it with healthier and higher-quality food. Second, Potbelly already has excellent gross margins, and has lots of room to raise them going forward.
So, why does Potbelly trade at a deep discount to Chipotle? The answer is most likely Potbelly's smaller margins. Although its operating margins are significantly lower than Chipotle's, they are not an accurate reflection of where the company could be in a few years. During this phase of rapid expansion, Potbelly's operating margins are pressured by new store openings.
Because Potbelly is rapidly expanding and opening tons of new stores, its P/E multiple is inflated. This is misleading because Potbelly's earnings are bogged down by temporary costs to spur growth, and thus don't accurately display the company's true earning potential.
This anticipated operating margin expansion is actually already unfolding. In the first half of 2013, Potbelly increased its net income by 26% to $4.9 million. That increase was considerably higher than revenue growth of 15%.
If Potbelly grew to just 10% the size of Subway, it would have 2,300 restaurants. Armed with $105 million in cash from its recent IPO, Potbelly's will be accelerating store openings.
It's just a matter of time before investors wake up to this opportunity. Given Potbelly's cheap valuation, it appears the rapid growth has yet to be priced in.
Potbelly is a long-term growth story in its early stages. The sandwich market in the U.S. is big enough to accommodate the growth of Potbelly's to more than 2,000 stores - or a 10x increase. This long runway for growth gives Potbelly the potential to grow very quickly in the years ahead.
New York City, New York
Disclosure: Galileo Russell owns shares of Potbelly (NASDAQ: PBPB).
Our research team found a stock that pays dividends so big - you can live off them. This cash-cranking company has hiked its dividend 10-FOLD... paying investors like you dividends of $428.57, $913.93, and $924.43! If these ever-increasing payouts sound good to you, click here for all the details.
Thursday, November 7, 2013 Don't Buy Twitter IPO at $45 The Twitter IPO has investors lining up to buy shares of the second largest social network. And that considerable interest is sending shares soaring 74% above their IPO price.
Latest Daily Profit
Wednesday, November 13, 2013 Great Companies vs. Great Investments The secret to making money in the stock market is NOT to simply invest in great companies, but to identify great investments. That may come as a surprise, but it's true.
Tuesday, November 12, 2013 Three Recent IPOs that are Better than Twitter Give Twitter (NYSE: TWTR) credit: its IPO lived up to the hype. Twitter's stock shot up by 73% just one day after going public above its expected range at $26 per share last week.
Disclaimer & Important Information
WyattResearch.com is owned and published by Wyatt Investment Research. Wyatt Investment Research is neither a registered investment adviser nor a broker/dealer. Readers are advised that this electronic publication is issued solely for information purposes and should not to be construed as an offer to sell or the solicitation of an offer to buy any security.
We encourage you to review our full Email and Disclosure policies. To view our Email Policy, please click here. To view our Disclosure Policy, please click here.
If you believe this communication to be a mistake or unsolicited, please e-mail email@example.com with details regarding your situation, and we will be sure to promptly investigate your situation.