3 Reasons to Sell PBPB and 1 Stock to Buy Instead

Potbelly has been treading water for the past six months, recording a small return of 1.4% while holding steady at $10.35.

Is there a buying opportunity in Potbelly, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Potbelly Not Exciting?

We're swiping left on Potbelly for now. Here are three reasons why there are better opportunities than PBPB and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Potbelly’s sales grew at a weak 1.8% compounded annual growth rate over the last six years. This fell short of our benchmarks.

2. Fewer Distribution Channels Limit its Ceiling

With $465.1 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. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Potbelly was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.6% was weak for a restaurant business. This result is surprising given its high gross margin as a starting point.

Final Judgment

Potbelly’s business quality ultimately falls short of our standards. That said, the stock currently trades at 10.2× forward EV-to-EBITDA (or $10.35 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Like More Than Potbelly

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