http://seekingalpha.com/article/2463825-reiterate-papa-murphys-short-thesis-q2-2014-update
"Summary
We re-iterate our short thesis, as there are two near-term catalysts which will potentially cause the equity to re-rate to our “super-optimistic” price target of ~$5 per share or roughly 40% upside to the short thesis. Two potential near-term catalysts include a potential sponsor exit (hence the sell-side bullishness) through a secondary sale and EBITDA pressure derived from franchisee issues and royalty relief expanded upon below.
Key highlights and updates since the most recent quarter are as follows:
http://seekingalpha.com/article/2503975-id-be-mad-at-myself-if-i-didnt-short-these-3-stocks
“Papa Murphy’s (NASDAQ:FRSH[/URL]) stock has been about flat since its May IPO. The company makes and sells pizzas that customers take home and bake in their ovens. This concept is similar to a Midwestern chain Homemade Pizza which went bust earlier this year. There are several reasons to short Papa Murphy’s, including: 1) 30%+ of franchisees are in financial distress (losing money at the operating level) based on a relief plea franchisees made earlier this year (2) while Papa Murphy’s sells at an apparent P/E multiple of about 18x, after factoring in the potential for lost royalties from troubled franchisees, Papa Murphy’s sells for 45x earnings (3) the company has a weak balance sheet with over $100 million worth of debt. While the company has been able to service the debt thus far, if troubled franchisees halt royalty payments, Papa Murphy’s could be in financial distress and (4) Papa Murphy’s IPO lock up expires November 2. This means that millions of shares are likely to come to market. While the stock has been strong the past couple of weeks (likely due to a short squeeze), a flood of new shares is likely to hurt the share price. I think that normalized earnings for Papa Murphy’s are somewhere around $0.30-0.35 per share (assuming ½ of troubled franchisees are forced to exit). Applying a 10x P/E multiple gets me to a share price of $3.00-$3.50, roughly 70% below today’s levels.”
"Summary
[]Papa Murphy’s Continues to be a compelling short with ~40% upside to the short thesis.
[]Franchisee lawsuits have continued to intensify with a second lawsuit filed. Furthermore, we continue to see franchisee bankruptcies on the horizon with a recent bankruptcy in multi-unit franchiser in Texas.- FRSH has recently initiated a royalty waiver program for new franchisees, signaling to use that the Company is having issues growing in new markets.
We re-iterate our short thesis, as there are two near-term catalysts which will potentially cause the equity to re-rate to our “super-optimistic” price target of ~$5 per share or roughly 40% upside to the short thesis. Two potential near-term catalysts include a potential sponsor exit (hence the sell-side bullishness) through a secondary sale and EBITDA pressure derived from franchisee issues and royalty relief expanded upon below.
Key highlights and updates since the most recent quarter are as follows:
[]Franchisee Issues Continue in Key Markets: Over the past three months, two lawsuits have been filed against Papa Murphy, highlighting the issues new franchisees are facing in markets outside of the Northwest. Additionally, this past August a nine store franchisee system declared bankruptcy in the supposedly strong Texas market (business-bankruptcies.com/cases/dtd-pizza-llc), followed by the recently announced sale of an additional nine stores located in Minneapolis, Minnesota back to Papa Murphy’s for roughly their replacement value. If a multi-unit franchisee was profitable, why would they dispose of the business for replacement value or lower (ex. sweat equity)? What is the most troubling is that these franchisees were multi-unit operators, not just single-unit “mom and pops”.
[
- ]Waiver of Royalties for New Franchisees: The Company’s franchising effort recently issued a promotion for new franchisees in ~17 select “growth” markets, waiving royalties for one year, in addition to providing $20K for digital menu boards and grand opening marketing. This suggests that FRSH cannot attract new franchisees due to the issues noted above, hence FRSH has chosen to go the Papa John’s (OTCPK
APA) route offering various incentives. The key takeaway is that with this new promotion, profit and growth estimates should have to come down. Finally, I wouldn’t be surprised to see if royalty relief and other spiffs have been extended to other newer franchisees, who appear to be suffering from low AWS as well."
http://seekingalpha.com/article/2503975-id-be-mad-at-myself-if-i-didnt-short-these-3-stocks
“Papa Murphy’s (NASDAQ:FRSH[/URL]) stock has been about flat since its May IPO. The company makes and sells pizzas that customers take home and bake in their ovens. This concept is similar to a Midwestern chain Homemade Pizza which went bust earlier this year. There are several reasons to short Papa Murphy’s, including: 1) 30%+ of franchisees are in financial distress (losing money at the operating level) based on a relief plea franchisees made earlier this year (2) while Papa Murphy’s sells at an apparent P/E multiple of about 18x, after factoring in the potential for lost royalties from troubled franchisees, Papa Murphy’s sells for 45x earnings (3) the company has a weak balance sheet with over $100 million worth of debt. While the company has been able to service the debt thus far, if troubled franchisees halt royalty payments, Papa Murphy’s could be in financial distress and (4) Papa Murphy’s IPO lock up expires November 2. This means that millions of shares are likely to come to market. While the stock has been strong the past couple of weeks (likely due to a short squeeze), a flood of new shares is likely to hurt the share price. I think that normalized earnings for Papa Murphy’s are somewhere around $0.30-0.35 per share (assuming ½ of troubled franchisees are forced to exit). Applying a 10x P/E multiple gets me to a share price of $3.00-$3.50, roughly 70% below today’s levels.”
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