Pizza and Pasta IPOs Aren't Making Investors Much Dough

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Papa Murphy's Pizza Fremont
Nicholas Eckhart/Flickr
A lot of restaurant stocks have gone public over the past year and change. Investors have been hungry for consumer-facing companies they know, and underwriters have been chasing growing eateries to go public. The aftermath hasn't always been pretty, with many of the recent debutantes either trading below their initial IPO prices or well off their earlier peaks.

The market got a chance to check back on a pair of the forgotten restaurant newbies after the market close on Wednesday. Papa Murphy's (FRSH) and Noodles & Co. (NDLS) posted their latest financials results. They are both growing, but apparently not fast enough to please finicky investors.

Some companies just can't live up to the hype.

Making Dough Rise

Papa Murphy's is the country's largest player in the take 'n' bake pizza category. It sells gourmet pies that consumers pick up and bake at home. It watches over 1,436 mostly franchised stores, making it 20 times larger than its nearest competitor.

There's growth in this niche. Papa Murphy's experienced a 14 percent surge in revenue, fueled by expansion and a 1.5 percent uptick in comparable store sales. The growth isn't a fluke. Papa Murphy's has come through with positive comps in 36 of the past 41 quarters.

Net income on an adjusted basis nearly tripled to $1.1 million or 7 cents a share. Analysts were only holding out for 5 cents a share.

This is the pre-baked pizza chain's first full quarter as a public company, and normally the market would be eating up a company that posts better than expected results on both ends of the income statement in its first report. Yet Papa Murphy's isn't setting a lot of tongues wagging so far.

The company went public at $11 in May, settling for the low end of its initial $11 to $13 pricing range. There wasn't a lot of buzz here, and the stock closed at just $11.05 on its first day of trading. That was a good day for investors in retrospect. The stock has closed in the single digits in all but one day over the past two months.

Wet Noodles

There was a little more buzz when Noodles & Co. went public last summer. The fast casual chain specializing in pasta done up in several global-cuisine iterations was a market darling when its IPO hit the market. Noodles & Co. went public at $18, and within a few days it was peaking above $50. It's been rough after that, with the stock shedding more than half of its peak value.

Noodles & Co. wasn't as fortunate as Papa Murphy's in its latest quarter. Revenue may have moved 12 percent higher, but the growth was entirely the handiwork of expansion. Comparable restaurant sales and adjusted earnings declined for the period.

Papa Murphy's may have beaten analyst sales and profit projections, but Noodles & Co. fell short on both fronts. Investors shouldn't be surprised. This is the third consecutive quarter that it posts adjusted profits that fall short of Wall Street estimates.

Noodles & Co. did point out that comparable restaurant sales have been trending positive halfway through the current quarter, but the stock still took a hit in after-hours trading on the disappointing report. Noodles & Co. went public flying the same fast casual banner as Chipotle Mexican Grill (CMG), clearly it's nowhere close to being in the same league.

Eat Up

The market isn't giving up on all newbie restaurant stocks. One of last month's biggest winners was El Pollo Loco (LOCO). The California-based chain grilling up citrus-marinated chicken has more than doubled since going public at $15 three weeks ago.

The moral of the story is that you can't treat all restaurants the same. Noodles & Co. followed up its bad report on Wednesday by lowering its growth expectations. It now sees flat same-restaurant sales and earnings growth in 2014. Papa Murphy's is sticking to its earlier guidance, calling for 105 new domestic franchise store openings, comparable store sales growth of 2 percent and $830 million in system-wide sales. We're still waiting for El Pollo Loco to post its first quarterly report since last month's IPO.

No two recipes are the same, and the same can be said about the wave of restaurant stocks that recently went public.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our newsletter services free for 30 days.


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