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Muted IPO for 'take-and-bake' pizza chain Papa Murphy's

The Exchange
Franchisees Sue Papa Murphy's as Pizza Chain Prepares for IPO

Pizza seller Papa Murphy's (FRSH) was having a quiet session in its Nasdaq debut Friday, rising 5.6% after a weak pricing for its IPO. The stock, which priced at $11, the low side of what was anticipated, was recently adding 62 cents, or 5.6%, to $11.62.

Considering Papa Murphy's line of business and the initial offering market overall, it's not entirely a surprise investors weren't especially receptive to the new shares. Papa Murphy's, based in Vancouver, Wash., is a chain of about 1,400 shops, mostly franchised, that competes in the 71,400-store U.S. pizza market.

How is it different from the rest? The "take and bake" model is the primary point. That means you pick your sauce and toppings or one of the house items, the store then prepares it, and you pick it up to make in the oven in your own kitchen. Et voila. If it weren't obvious from the "FRSH" ticker symbol, Papa Murphy's is also emphasizing the freshness of its ingredients, a frequent refrain these days in the restaurant sector, as every operator seemingly wants to brag about the superiority of their offerings.

At any rate, Papa Murphy's trading level isn't saying it's a failure of a company or that it's food isn't worth having. What it is signaling is that investors simply weren't convinced of its prospects as a must-buy-now name. Among the probable reasons:

  • Competition. Every town, regardless of its size, has pizza, whether through chains or independents. They also have grocery stores with deli-made and frozen pizza if you're inclined to deal with the cooking. Unlike Zoe's Kitchen (ZOES), the Mediterranean chain that recently went public, Papa Murphy's was a tougher sell for traders.
  • Financials. Papa Murphy's entire system had $786 million in sales in 2013, but the company has lost money at least each of the last three years. It went public with $170 million in debt, though some of that will be paid back with proceeds from the IPO. Also, it's facing a franchisee lawsuit regarding the thoroughness of its business disclosures.
  • It's already fairly expansive. The chain, in 38 states, Canada and the United Arab Emirates, is planning to get to 4,500 U.S. stores eventually, triple where it is now. But that's not the kind of hypergrowth Wall Street likes to see. There's nothing wrong with a modest build-out pace, only that, in terms of how a stock is viewed, this might be a case of slow-and-steady, at best. Traders are greedy and want gains immediately, not the next Smucker (SJM).
  • A shaky IPO market. Several issues have had trouble lately, and some offerings have been delayed. Equity traders appear to be getting a bit choosier about what they'll pay up for after the five-year rally.
  • Industry issues. Restaurants were rose sharply last year, despite many having sluggish revenue growth and struggling for customer traffic. So far in 2014, these stocks have been subdued, much like the market. If a stock isn't forecast to be a clear winner in its group, to the extent anything can be, why hurry?

On the plus side, Papa Murphy's is involved in the "better" pizza movement that's getting talked about more, and for diners tired of having only Pizza Hut and Domino's (DPZ) nearby, it's a nice alternative, provided, again, you don't mind managing the baking.

Not "popping" on an IPO day is hardly a crisis. Plenty of stocks have soared at the outset in the past, and in the long run, it's meant little. Papa Murphy's, the company and the stock, may have ample success down the road, but investors aren't rushing in on this one yet. If it gets profits, grows at a sound pace and proves it's bringing in a bigger audience, that'll eventually change.