Potbelly has been treading water for the past six months, recording a small return of 4.9% while holding steady at $13.
Is now the time to buy Potbelly, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Potbelly Will Underperform?
We don't have much confidence in Potbelly. Here are three reasons why we avoid PBPB and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Potbelly’s 2.1% annualized revenue growth over the last six years was weak. This was below our standards.
2. Fewer Distribution Channels Limit its Ceiling
With $469.1 million in revenue over the past 12 months, Potbelly is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Potbelly’s five-year average ROIC was negative 6.8%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.
Final Judgment
Potbelly doesn’t pass our quality test. That said, the stock currently trades at 20.7× forward EV-to-EBITDA (or $13 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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