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Berko: It’s worth owning a piece of Papa Murphy’s pie

By Malcolm Berko
Published: November 30, 2014, 12:00am

Dear Mr. Berko: I’m 42 and a conservative, long-term investor. Since 2002, I have carefully built up a portfolio of 22 growth stocks, worth $140,000. I am thinking of taking a risk and buying 200 shares of Papa Murphy’s, a take-and-bake pizza company. What do you think of this stock as an investment?

— DP, Detroit

Dear DP: I once thought that the greatest invention in the world was the wheel, until I had my first pizza. Then I realized the world’s greatest invention was beer. A wheel just doesn’t go so well with pizza as beer,.

There are about 80,000 pizza joints in the U.S. — including Domino’s, Little Caesars, Pizza Hut and Papa John’s — that deliver to your home, your office or your pied-a-terre if you’re working late. However, this 80,000 number does not include Puerto Rico, American Samoa, Guam, the U.S. Virgin Islands, Wake Island, Jarvis Island or the Northern Mariana Islands, where I believe there are some really execrable pizza joints.

Now, I’ve had gustable pizzas in Wikieup, Ariz., and Umatilla, Fla., but I’ve seldom been more gruntled after tasting Papa Murphy’s (FRSH-$10) pizza when I was in Colorado Springs, Colo. FRSH is involved in the better pizza movement. It offers vegan dough and sauces, and then you also can pick your toppings — including butcher-quality meats and fresh, hand-sliced veggies (not the frozen packaged stuff used by most others) — and cheeses made from grade A pasteurized milk. After the folks there construct it, you take it home and bake it in your oven or pop it in the freezer until the next Detroit Lions or Red Wings game on TV.

There are 1,471 FRSH units in 38 states and Canada, plus nine in the United Arab Emirates, where (according to my source) some may use camel’s milk (unnnghh) to make cheese. Meanwhile, CEO Ken “KC” Calwell believes he can open 4,500 pizza joints (Domino’s has 11,000 stores) in the coming years, which is the kind of hyper-growth that excites Wall Streeters who love and live and die for quick profits.

And last May, this Vancouver-based company came public at $12.10. The initial public offering generated little enthusiasm, and the shares actually fell to the high-$8 level 20 days later because the underwriters — Jefferies LLC, Robert W. Baird & Co. and William Blair & Co. — failed to support the price. Last year, Papa Murphy’s 1,418 units recorded $786 million in revenues, selling millions of pizzas, and that is a lot of dough. That’s an average of $554,000 in revenues per franchised unit, returning fees of $37 million (according to management) to Papa Murphy’s income statement. FRSH has 17 million shares outstanding and a $5.30 book value. It also has $113 million of debt — which isn’t good, considering that FRSH has only $4 million in cash. Still, things are looking up.

The average pizza has 756 calories and is customizable to almost anyone’s tastes. Pizza is one of the nation’s most popular comfort foods, and making it is a fun and simple process. More than 3 billion are sold annually. Americans consume an average of 46 pizzas each per year (36 percent of us eat it for breakfast), and pizza sales are responsible for 11 percent of this country’s food service volume. And because it’s also a convenient food, revenues seem to be growing by about 4 percent a year.

Pizza also appears to be an inflation-proof business, and Papa Murphy’s has been doing this since 1981. It’s got a superb pie that can compete against anything on the market and a successful, uncomplicated business model. So I think a 200-share long-term investment makes good investment sense. FRSH isn’t going to zoom to the teens any time soon, but as a long-term investment, it could generate attractive capital gains over the coming few years. After a string of losses, FRSH expects to earn 45 cents a share this year and 53 cents in 2015. Among the six brokerages that follow the stock, five rate FRSH a “strong buy.” So buy the stock, and try the pie.

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