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Going Global

With the Australian Government and the Reserve Bank of Australia tentatively talking of green shoots appearing in the economy and in confidence levels, you’d be forgiven for thinking we have just emerged from a prolonged recession.  Over in the United States, the situation is somewhat different.  The US economy has been expanding for near seven years and green shoots have turned into celebratory fireworks in some sectors.

After describing some of the fireworks you might be left think the only green shoots emerging are those of a bubble.

Take a look at a business called Noodle & Co.  Noodle & Co is a takeaway chain with its head office based in Broomfield Colorado.  Broomfield has a population of 59,000 people.

Given this business is listed on the US NASDAQ exchange you might reasonably ask what earth shattering wares are proffered by this chain?  The answer to that is nothing really.  The company sells noodles. You get to choose from an eclectic line of macaroni & cheese, noodles with butter, Pad Thai, spaghetti & meatballs and steak stroganoff with cream sauce and egg noodles.

A regular sized portion of Pad Thai from the Tempe Arizona store will set you back $5.69.  An extra $2.99 will get you some oven roasted meatballs on that or some marinated steak and for 75 cents you can add extra Italian parmesan cheese.  Yes that’s right cheese and meatballs on your Pad Thai!

You wonder how many of these meals they can dish up.  According to one source, food critics began identifying it, in the late nineties, as the best fast-food restaurant in their respective cities and it won awards for fast-growth, healthy food and being family friendly. Revenues in 1996 were $300,000 but by the time the company listed in 2013, revenues had reached $300 million from 410 stores.

For the first three months of 2015 ending March 31, revenue increased 18.1% to $105.8 million, up from $89.5 million for the same quarter in 2014.

Like for like comparable restaurant sales increased 0.8% for company-owned restaurants, 1.4% for franchise restaurants and 0.9% system-wide.  Sixteen new restaurants opened, of which 13 were company-owned and three franchises.

But net profit declined to a loss of $2.8 million from a profit of $1.4 million in the previous corresponding period. The company recorded a $5.9 million pre-tax impairment charge related to eight restaurants in 2015.

Shares in Noodle & Co are trading at 44 times earnings.

Another company that caught our attention in the US is Potbelly.  Potbelly started out as an antique shop called Hindsight that also served toasted sandwiches to its bric-a-brac-fossicking customers.  An entrepreneurial Bryant Keil bought the original store on Lincoln Avenue in Chicago, Illinois and has since expanded it to over 280 Potbelly Sandwich Stores across the US that still maintain a local store ‘vibe’ (think Cheers) offering live jazz and blues as well as, perhaps unremarkably, soup, shakes, malts, smoothies, and cookies.  For the first three months of 2015 ending March 29, total revenues increased 16.1% to $85.8 million from $73.9 million and company-operated comparable store sales increased 5.4%.

Net profit attributable to Potbelly Corporation was $0.5 million, compared to net loss of $0.3 million during the same fiscal period of 2014. According the a variety of estimates, Potbelly’s shares trade between 81 times earnings and 101 times earnings.

None of this is normal.   And as mathematician Herbert Stein once wryly observed, “If something cannot go on forever, it will stop.”

But before you run to the phone to pull the sell trigger, it is imperative to know that these pockets of irrational exuberance are not having a dramatic impact on our local market and while there are some businesses whose shares are trading at all time highs as well as extended price to earnings multiples, more than two thirds of the 70 per cent invested in equities in The Montgomery Fund is allocated to companies that still trade at a discount to our estimate of their intrinsic value.  This suggests to us that, while dangers are indeed increasing, there may be more growth in those green shoots.

 
Roger Montgomery
Roger Montgomery

Roger shares his stock market insights at his Insights blog, blog.rogermontogmery.com. Investors can also follow Roger on Facebook and watch media interviews at his YouTube channel. Grab your Second Edition copy of Value.able and learn how Roger Montgomery values the best stocks and buys them for less than they're worth. Grab the book now at special price!