The casual restaurant space with its plethora of companies trading for premium valuations continues to be volatile this earnings season.
While there have been a few winners like Chipotle Mexican Grill (NYSE: CMG) and Panera Bread (NASDAQ: PNRA) that have managed to shoot higher after results were reported, there have been a few notable losers.
One such loser is Potbelly (NASDAQ: PBPB). The company shed 9% on Wednesday after reporting earnings results on Tuesday after the market closed.
On the profit side, the company’s adjusted earnings of 6 cents per share in the fourth quarter beat estimates by 2 cents per share. That’s where the good news stops.
On the sales side, revenues of $74.8 million were below the estimate of $76 million. Same-store sales were up a paltry 0.7% down from a gain of 2.5% in the previous quarter.
In addition to those weak numbers, Potbelly lowered its guidance to single-digit same-store sales growth for the remainder of the year.
Spinning the numbers, management remained optimistic about hitting 10% unit growth and 20% earnings per share growth per annum.
To be fair, the company was hit by poor weather and rightly blamed the polar chill for its poor results in the last quarter weak guidance, but these results stink, especially for a newly minted publicly traded company.
Investors deserve better when they pay the premium valuation that Potbelly obtained when first offered to the public. Indeed, it has been nothing but downhill for investors in the six short months of trading publicly.
Will Potbelly go down as a failed IPO or is the weakness, exacerbated on Wednesday, an opportunity?
Management commitment to 20% earnings per share growth is enticing, assuming they can deliver. So far that has not been the case.
At a certain price, though, shares will be attractive and that may or may not be the case now.
Analysts expect Potbelly to grow profits by 12% in 2014 far from the 20% goal stated by management. At current prices including the 9% drop on Wednesday, shares trade for 54 times 2014 estimated earnings.
Now we understand why the stock is dropping. Has it gone low enough?
I don’t think so.
The weakness of the fourth quarter will surely hit the company in the first quarter of 2014. Profits for the year are at risk to be weaker than expected – perhaps dropping growth to the single digits.
That would be a disaster.
I’d avoid Potbelly until shares drop another 10% or more. This one could fall 25% to 30% if the disappointment continues.
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