I started nibbling on FRSH on IPO day at $11.25 (WHOOPS), later at 9.98 (WHOOPS again) and Thursday at 9.15. It closed Friday at 9.34 after reporting fairly good earnings in my opinion, then again I’m obviously more than an an average interested party.
The unique pizza maker reported .12/share. This was better than what some expected as some shareholders clearly ran for the exits ahead of the quarter. It turns out that FRSH is not necessarily the latest of a laundry list of overpriced IPO’s. It could be just fine and a fairly good long term investment. Let’s take a look.
Papa Murphy’s grew same store stales 3.3% in the quarter (o.k. given the environment) and revenues by expanded nearly 20% after excluding a one-time credit from the same time a year ago. Not bad right? The chain currently has 1,400 locations across the country but hopes to have as many as 4,500 in the future. Never heard of Papa Murphy’s? You probably live in the south or northeast. I had never heard of them until a couple of years ago when i started researching franchise opportunities. They recently expanded into Texas which has given me more in insight than I would typically have on a new issue.
I studied Papa Murphy’s FDD in 2011 and early 2013 and I would probably own one today if we didn’t get pregnant with our second child. They’ve always planned to go public and probably only waited this long because their comps in 2010/2011 were so good, a favorable comparison would have been almost impossible.
Now public, the company seems poised for growth while using the IPO proceeds to pay down debt. Pizza is certainly a crowded space with nearly 72,000 pizzerias in the U.S. alone. But it’s also a $40 billion industry which is why many want in on the action. Fast casual favorite Chipotle (CMG) even wants a piece of the preverbal pie by investing in a pizza concept of their own, just to name one.
So why buy Papa Murphy’s stock? It’s a unique concept, offering dough made fresh DAILY, never frozen. The pizzas are made in front of you a-la Subway for sandwiches and there’s little overhead. No pizza ovens, no delivery, better hours (11AM-9PM), which all allow for the freshest ingredients while maintaining a competitive price point. That brings us to my next point.
Papa Murphy’s offers uncooked pizza, which has its challenges, no doubt, BUT that also allows people to pay with SNAP (food stamps). It’s a pity that this is a positive, but we’ve all seen the statistics of Americans on food stamps. They’re not accepted at Domino’s or Pizza Hut, but they are at Papa Murphy’s. When I talked to franchisees during my due diligence some said folks would drive 30 minutes out of their way just to use their SNAP card. It’s an added bonus.
The challenges are easy to spot. Why make my own pizza when it can be prepared for me? If you need several pizzas at any given time, hard to bake more than one in the same oven. It’s a separate stop outside of the normal grocery store requiring more planning. I’m sure you can think of your own.
Why does it work? The product is good. Almost 75% of people who try Papa Murphy’s return and even more recommend it to a friend. They have the lowest average check in the industry at $5.39, due to the low overhead we already discussed. The franchisees I talked to (nearly 20) were quite happy with management and the support system which is key for the franchise model to work. I can not say the same for other franchises, but that’s another story I guess.
At $9.34, where it closed Friday, FRSH is by no means cheap, but I think this company can earn .75/share in fiscal 2015. Slap a 20 multiple on that and you get to a $15 stock price, not bad. If you think 20x is expensive, consider Dominos (DPZ) currently fetches 28x, and is not growing EPS at the same rate. Nonetheless, DPZ remains the unquestioned leader in the space so a premium seems fair.
I think Wall Street might be missing out on Papa Murphy’s because they can’t see it from their window. It could be getting thrown out like many recent IPO’s. That’s an opportunity for you and me. Watch that $9.05 level closely and if it holds, Papa Murphy’s could fit nicely in the speculative portion of your portfolio.
I AM LONG FRSH at the time of this posting.