Vancouver-based Papa Murphy’s caught the attention of investors earlier this month when the company announced that it might be considering putting its take-and-bake pizza business up for sale.
The pizza chain was founded in Hillsboro, Ore., in 1981 and grew into an international business with approximately 1,500 franchised and company-owned locations. It went public in 2014, but the company has been struggling in recent years to keep up in an increasingly competitive casual food industry, and its stock price has hovered around $5 per share.
As part of the company’s third-quarter earnings report, CEO Weldon Spangler and other Papa Murphy’s officials announced that the company has undertaken a review process to explore strategic alternatives, including the possibility of selling the business.
The Nov. 7 announcement was immediately followed by a jump in the company’s stock price, and its stock has remained above $5 in the subsequent two weeks, compared to a low point of $4.72 shortly before the release of the third-quarter report.
The Columbian reached out to Spokane-based Signia Capital, the second-largest institutional investor in Papa Murphy’s, and asked the firm to weigh in with its take on the news of the potential sale and what its investors are hoping to see from the pizza chain. Signia Capital portfolio manager Colin Kelly responded on behalf of the firm:
As the second-largest institutional stock holder of FRSH, does Signia Capital have an opinion about the sale of Papa Murphy’s? Does Signia Capital have another preferred course for Papa Murphy’s?
We believe that shareholder value could be unlocked by exploring a potential sale. Given the relative valuation gap with Papa Murphy’s (FRSH) trading at 7x EV/EBITDA and other highly franchised peers (SONC, PZZA, & DIN) trading at 11-18x EV/EBITDA, a sale process would allow shareholders to close that valuation gap and monetize their investment.
(Editor’s note: EV/EBITDA, or Enterprise value/Earnings before interest, tax, depreciation and amortization, is a popular valuation multiple used in the finance industry to measure the value of a company. Also, SONC is the stock symbol for Sonic, Corp.; PZZA is the symbol for Papa John’s International Inc.; and DIN is the symbol for Dine Brands Global Inc.)
Weldon Spangler was hired as chief executive in June 2017. How’s he doing?
The new management team at FRSH appears to be taking the right steps to stabilize sales, as shown by the company’s most recently reported quarter. Focusing the company message on value and technology (mobile ordering & delivery) seem to be gaining traction with those franchisees that have adopted the strategic marketing plan.
What advice would you give Weldon Spangler on making Papa Murphy’s consistently profitable? Has Signia Capital shared this advice with Spangler?
We are passive investors. Although we do talk with management, we do not actively engage in offering recommendations to management teams.
How long has Signia Capital been a Papa Murphy’s investor, and why did Signia Capital invest in Papa Murphy’s?
We have been investors in FRSH since Q1 of 2017. We originally invested in Papa Murphy’s as we saw a regional brand that had a strong track record of same store sales growth over the past decade, but had encountered some headwinds as the company attempted to grow outside of its core geography. We believed much of this was priced into the stock and that the company was taking the right steps to address these headwinds through:
1. Divesting company-owned locations and re-franchising. The company would then use the proceeds to pay down debt.
2. Slowing new unit growth and focusing on existing franchisees.
3. The potential for a new CEO, as at our time of investment the CEO was Jean Birch, who was serving in an interim capacity.
What’s your take on how the Papa Murphy’s stock has performed since the Q3 report?
Papa Murphy’s stock has seen a 16 percent increase since the company reported in early November. In our opinion, the increase in share price is a result of improving company fundamentals, along with the announcement of the exploration of strategic alternatives.
What will you be looking for or hoping to see from the company in the coming months and in its next quarterly report?
In the coming quarters we will be looking for continued improvements in same-store-sales (SSS), progress on the sale of company owned stores, and updates on the strategic review process.
