Guest Post: Even A Money-Losing Pizza Chain Can Do An IPO
Authored by Jonathan Weil, originally posted at Bloomberg View,
Just when it seemed like investors might have lost some of their appetite for initial public offerings of companies that lose money . . . yeah, right.
Papa Murphy's Holdings Inc. priced its IPO today at $11 a share. The stock closed up a nickel. I've grown accustomed to seeing IPOs by profitless technology companies. But this is a pizza chain that had net losses of $606,000 in 2011, $2.1 million in 2012 and $2.6 million in 2013.
Now it has a stock-market value of about $187 million, or about 2.3 times its revenue last year. Founded in 1981, Papa Murphy's, based in Vancouver, Washington, sells uncooked pizzas that customers take home to bake. It had been majority-owned since 2010 by private-equity firm Lee Equity Partners LLC.
I can somewhat understand the appeal of speculating on some unproven Internet company that loses money but promises to change the world. But a 33-year-old pizza chain? Come on. In its registration statement, the company said that it has been "repeatedly rated the #1 pizza chain in the United States by multiple third-party consumer studies." So assuming that's true, why can't it make money?
Oh, but wait. It does make money on an "adjusted Ebitda" basis, which is one of those silly metrics that companies make up when they don't have actual profits to show off. Papa Murphy's said it had $24.4 million of adjusted Ebitda last year, which helpfully excluded such obviously unimportant items as -- their words here, not mine -- "expenses not indicative of future operations," "management fees and related expenses," "transaction costs" and "new store pre-opening expenses."
And of course, this makes soooo much sense. Because as we all know, management fees, transaction costs and new-store expenses aren't the same things as money. And shouldn't we all be blessed with the same power of insight that Papa Murphy has to distinguish between expenses that are indicative of the future and expenses that aren't?
Go ahead, try the pizza. But stay away from the stock.
Nope - No Bubble Here!!!
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