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Papa Murphy’s Holdings, Inc.

An Investment Analysis Report

Max Adams

Quick Overview

CompanyPapa Murphy’s Holdings, Incorporated

TickerFRSH - Nasdaq

Residence CountryHeadquartered in USA

Market Capitalization$198.06 million

Current Price$11.69 per share

Trailing P/E Ratio38.84

Estimated Annualized 5-Year Earnings Growth Rate12.5 percent

PEG2.35

5-Year Price TargetMarket capitalization of $332,115.83, price of $20.41 per share

Recommendation and RationaleIt is not recommended that Papa Murphy’s remain a candidate for investment because of weakness in several financials and limited future growth.

Contents

Title Page

Quick OverviewCompanyTickerResidence CompanyMarket CapitalizationCurrent PriceTrailing P/E RatioEstimated Annualized 5-Year Earnings Growth RatePEG5-Year Price TargetRecommendation and Rationale

Contents

Overview of the CompanyBasic DescriptionHistoryProductGoalsBoard of DirectorsManagement Team

Competitive LandscapeMarket Size and CharacteristicsCompetitive FirmsPorter’s Five Forces AnalysisCompetitive AdvantagesFreshnessUnique Usage Situation

Inexpensive

Quality of Company FinancialsReceivablesInventoriesFixed AssetsRevenuePension Plan ExpensesGains on Asset SalesCompressed MarginsDuPont Comparison

Quality of Business ModelStrengthsWeaknessesCompetition Comparison

Non-Valuation Investment ThesisInvestment ThesisJustification for ThesisObjections to Thesis

Non-Valuation Investment RisksUncontrolled Business Inputs

Earnings Model Key AssumptionsSales Growth Average Percent of SalesValuation AssessmentAsset Valuation Ratio MethodEmployee Number Correlation MethodLinkedIn Follower Correlation MethodFacebook Follower Correlation MethodTwitter Follower Correlation Method

Instagram Follower Correlation Method Statistical AnalysisFinal Average ValuationConclusions

AppendixEarnings ModelChart Reference Data

Overview of the Company

Basic Description

Papa Murphy’s Holdings, Inc. is an international pizza distributor chain. It is based around the concept of freshness in its pizzas, letting customers design their pizzas and then cook them in their own homes. This is a fairly novel approach that has allowed it to expand into nearly 1,500 locations worldwide.

In Papa Murphy’s own words, “Papa Murphy’s is a high-growth franchisor and operator of the largest Take ‘N’ Bake pizza chain in the United States, selling uncooked pizzas that customers bake at home. The Company was founded in 1981 and currently operates over 1,500 franchised and corporate-owned fresh pizza stores in 38 States, Canada and United Arab Emirates. Papa Murphy’s core purpose is to bring all families together through food people love with a goal to create fun, convenient and fulfilling family dinners. In addition to scratch-made pizzas, the company offers a growing menu of grab 'n' go items, including salads, sides and desserts.”

History

Papa Murphy’s dates back to 1981 when Papa Aldo’s pizza chain was founded in Hillsboro, Oregon. In 1995, Papa Aldo’s was merged with a California based pizza chain founded in 1984 called Murphy’s Pizza. That merger was the genesis of Papa Murphy’s name under Terry Collins. In 2004, Papa Murphy’s was merged again with PMI holdings.

More recently, Papa Murphy’s sold out to the New York City-based firm Lee Equity Partners, which then proceeded to take the company public several years later in May 2014. After selling $64 million in shares, Papa Murphy’s remains traded publicly on the Nasdaq.

Product

The Papa Murphy’s product is a variety of uncooked pizzas and pizza side dishes including pizzas, stuffed pizzas, salads, pizza-complementary desserts, drinks, and breadsticks. This is a fairly typical array for any pizza chain, but Murphy’s differentiates itself in that all of these products are uncooked so as to maintain freshness for the end consumer. Goals

Papa Murphy’s continues to hold that it is a “high-growth franchisor.” What this means is unclear, however. Although Papa Murphy’s has a self-proclaimed growth-focused mindset, it’s actual quantifiable growth and expansion goals for the next several years is not clear. Given that it has grown to 1,425 locations since its inception, though, Murphy’s is likely to keep growing at a rate of approximately 41 locations annually if its growth is continuous.

Board of Directors

Although the board of directors is diverse in its background and experience, a theme of experience in management within the food industry is pervasive. This relevant experience at competitive firms is valuable to Papa Murphy’s future prospects. Included here are all of the members of their board along with a brief

description of their relevant work experience.

Ken CalwellChief Executive Officer and President

Ken Calwell has served as Papa Murphy’s President since June 2011 and as Papa Murphy’s Chief Executive Officer and a member of Papa Murphy's Board since December 2011. Mr. Calwell has extensive experience in the restaurant industry. Before joining Papa Murphy’s, Mr. Calwell served as the Chief Marketing Officer and Chief Food Innovation Officer of Wendy’s International from 2008 to 2011. Prior to that, Mr. Calwell served at Domino’s Pizza, Inc. as Chief Marketing Officer and Executive Vice President of Research and Development, from 2001 to 2008. Before joining Domino’s Pizza, Inc., he served as Vice President of New Product Development at Wendy’s International, Inc. from 1998 to 2001. Mr. Calwell also served as the Senior Director of Marketing at Frito Lay, Inc. (PepsiCo) from 1996 to

1998 and in roles of increasing responsibility at Pizza Hut starting as Associate Marketing Manager in 1988 to Senior Director of Marketing in 1996.

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John BarChairman of the Board and Company

John Barr has served as Chairman of Papa Murphy's Board since October 2009 and as Chairman of the Company since December 2011. Mr. Barr previously served as Papa Murphy's Chief Executive Officer from April 2005 to December 2011. Since December 2013, Mr. Barr has also served as Chairman of the Board of Managers and Chairman of Project Pie LLC. Prior to joining Papa Murphy’s, Mr. Barr served as President and Chief Executive Officer of Automotive Performance Industries from June 1999 to April 2004. He served as President, Chief Operating Officer and a Director of Quaker State Corporation from June 1995 to December 1999. Prior to joining the Quaker State Corporation, Mr. Barr spent 25 years with The Valvoline Company, a subsidiary of Ashland, Inc., where he was President and Chief Executive Officer from March 1987 to June 1995. In addition to working with above referenced companies, Mr. Barr has been a member of the Board of Directors of Penske Automotive Group, Inc. since December 2002 and a member of the Board of Directors of United Road Services Inc. since January 2013. Mr. Barr was previously a member of the Board of Directors of the following corporations: Performance Logistics Group, Inc. from March 2004 to January 2007; UST, Inc. from December 2003 to December 2008; Clean Harbors Environmental, Inc. from August 2003 to May 2009; James Hardie Industries NV from September 2003 to March 2008; and

Home Base, Inc. from July 1997 to March 2002.

Jean BirchDirector

Jean M. Birch has served as a member of Papa Murphy's Board since April 2015. Mrs. Birch also serves as the Chief Executive Officer and President of Birch Company, LLC. Previously, Mrs. Birch served as President of IHOP Restaurants, Inc. from June 2009 to August 2012. Prior to IHOP, Mrs. Birch served as President of Romano's Macaroni Grill and President of Corner Bakery Café. Mrs. Birch also held executive leadership roles within YUM! Brands, Inc., a global quick service restaurant company, including Vice President, Operations for Taco Bell, Inc. and, Senior Director, Concept Development for Pizza Hut, Inc. She currently serves on the Board of Directors of Cosi, Inc. and Darden Restaurants, Inc. and previously served on the Board of Directors of the Children's Miracle Network Hospitals.

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John ShaferDirector

John Shafer joined Papa Murphy's Board in October 2006. Mr. Shafer was the Chief Executive Officer of Allied Domecq Retailing USA , in the former controlling shareholder of Dunkin’ Donuts, Baskin-Robbins and Togo’s Eateries, from 1999 until he retired in January 2003. Mr. Shafer also served on the Board of Directors of Mrs. Fields, Inc. from 2005 to 2008.

Benjamin HochbergDirector

Benjamin Hochberg has served as a member of Papa Murphy's Board since May 2010. He is a Partner at Lee Equity Partners, LLC. Prior to joining Lee Equity in May

2006, Mr. Hochberg was a Principal at Odyssey Investment Partners, LLC, a middle-market private equity investment firm. Prior to Odyssey, Mr. Hochberg worked at Bain Capital Partners, a global private equity investment firm, where he most recently held the position of Principal. Mr. Hochberg also serves on the board of directors of Paragon Industries, Inc., The Edelman Financial Group, Inc., Skopos Financial Group, LLC and Aimbridge Hospitality, LLC.

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Yoo Jin KimDirector

Yoo Jin Kim has served as a member of Papa Murphy's Board since May 2010. Mr. Kim is a Partner at Lee Equity Partners, LLC. Mr. Kim was with Bain Capital Partners, a global private equity investment firm, where he most recently held the position of Principal. Mr. Kim also serves on the board of directors of Paragon Industries, Inc., Cross MediaWorks, LLC, Eating Recovery Center LLC, Aimbridge Hospitality, LLC and Project Pie LLC.

David Mounts Director

David Mounts has served as a member of Papa Murphy's Board since August 2014. Mr. Mounts also serves as Chairman and Chief Executive Officer for Inmar. He has extensive operations and financial management experience in the U.S., Europe and Asia. Prior to joining Inmar, he was Executive Vice President of Supply Chain for Domino's Pizza, Inc. He also served as Domino's Chief Financial Officer from 2005 to 2007. Prior to Domino's, Mr. Mounts held several positions during a nearly 23 year tenure at UPS, including Chief Financial Officer, UPS Supply Chain Solutions, and Vice President of Mergers and Acquisitions. He is Chairman of the Wharton Alumni

Executive Board, serves on the Board of Visitors for the Wake Forest University Schools of Business and is a member of the Board of Directors for the United Way of Forsyth County.

Rob WeisbergDirector

Rob Weisberg has served as a member of Papa Murphy's Board since April 2015. Mr. Weisberg also serves as Chief Executive Officer of Invaluable, the world's leading online live auction marketplace. Prior to joining Invaluable in October 2012, Mr. Weisberg served for three years as Chief Marketing Officer at Zipcar, Inc., where he contributed to the company's membership growth and initial public offering. Previously, Mr. Weisberg served as Vice President of Multimedia Marketing at Domino's Pizza from December 2004 to January 2010. Prior to Domino's Pizza, Mr. Weisberg worked in account services at several prominent advertising and public relation agencies including Ogilvy & Mather.

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Jeffrey WelchDirector

Jeffrey B. Welch has served as a member of Papa Murphy's Board since April 2015. Mr. Welch also serves as an international development consultant with the Gerson Lehrman Group. Previously, Mr. Welch held various executive roles within Krispy Kreme Doughnuts Inc., including President, International and Senior Vice President and General Manager of Global Franchise Operations and Development. Prior to joining Krispy Kreme in April 2004, Mr. Welch served as the Vice President, Real Estate, International for The Home Depot, Inc. Throughout his career he has held various positions for Tricon Global Restaurants, Inc. where he focused on business and franchise development for leading restaurant brands, including Pizza Hut, KFC and Taco Bell.Management Team

Similar to the Board of Directors, the Management Team of Papa Murphy’s Holdings is also very strongly rooted in the food industry, with management roles in various nationwide food brands. This similar level of industry experience will be invaluable to Papa Murphy’s going forward. They are presented here with a brief description of their relevant past experience. Ken Calwell heads the Management Team as well as the Board of Directors

Ken CalwellChief Executive Officer and President

Ken Calwell’s description is also found above in “Board of Directors,” but is included here for reference.

Ken Calwell has served as Papa Murphy’s President since June 2011 and as Papa Murphy’s Chief Executive Officer and a member of Papa Murphy's Board since December 2011. Mr. Calwell has extensive experience in the restaurant industry. Before joining Papa Murphy’s, Mr. Calwell served as the Chief Marketing Officer and Chief Food Innovation Officer of Wendy’s International from 2008 to 2011. Prior to that, Mr. Calwell served at Domino’s Pizza, Inc. as Chief Marketing Officer and Executive Vice President of Research and Development, from 2001 to 2008. Before joining Domino’s Pizza, Inc., he served as Vice President of New Product Development at Wendy’s International, Inc. from 1998 to 2001. Mr. Calwell also served as the Senior Director of Marketing at Frito Lay, Inc. (PepsiCo) from 1996 to 1998 and in roles of increasing responsibility at Pizza Hut starting as Associate Marketing Manager in 1988 to Senior Director of Marketing in 1996.

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Mark HutchensChief Financial Officer

Mark Hutchens has served as Papa Murphy's Chief Financial Officer since January 2014. Previously, Mr. Hutchens served as the Vice President, Chief Financial Officer – International, for Bloomin’ Brands, Inc. from October 2012 to January 2014, where his responsibilities included finance, business development and supply chain management activities for Outback Steakhouse International. Prior to that, Mr. Hutchens served in various roles of increasing responsibility at Office Depot, Inc., including Senior Vice President, Controller and Chief Accounting Officer from September 2008 to March 2012 and Senior Vice President Finance, International Division from November 2006 to September 2008. From 1996 to 2006, he worked with YUM! Brands, Inc. where his most recent title was Assistant Treasurer – Corporate Finance. From 1989 to 1996, Mr. Hutchens worked at Ford Motor Company.

Victoria BlackwellChief Legal Officer and Senior Vice President of Talent

Victoria Blackwell has been with Papa Murphy’s for almost 13 years and has served as Papa Murphy's Senior Vice President of Talent and Chief Legal Officer since November 2012. Ms. Blackwell previously served as Senior Vice President and General Counsel from February 2007 to November 2012, Vice President Legal from March 2005 to February 2007 and Associate Attorney from July 2001 to March 2005.

Dan HarmonSenior Vice President of Operations

Dan Harmon has served as Papa Murphy's Senior Vice President of Operations since August 2013. Mr. Harmon previously served as Papa Murphy's Vice President, East Division from September 2012 to August 2013. Before joining Papa Murphy’s, he held various roles at Potbelly Sandwich Works, LLC, including West Zone Director from September 2008 to September 2012 and Regional Director, Texas from

October 2007 to September 2008. Prior to Potbelly Sandwich Works, LLC, Mr. Harmon held various roles at Blockbuster, Inc. including Regional Director of Operations for Western Canada, Director of Operations & Collections and District Manager and at McDonald’s Corporation as an Operations Manager.

Jayson TippChief Development Officer and Senior Vice President of Technology

Jayson Tipp has served as Papa Murphy’s Chief Development Officer and SVP, Technology since May 2015. Jayson previously served as Papa Murphy’s Senior Vice President of Marketing, Strategy & Technology from November 2012 to May 2015, and Senior Vice President of Strategy from May 2012 to November 2012. He joined Papa Murphy’s from Redbox Automated Retail, LLC, a division of Outerwall, Inc. where he was Vice President of CRM and Analytics from December 2010 to May 2012. Prior to Redbox Automated Retail, LLC, Jayson was Vice President of Strategic Planning at Coinstar, Inc., also a division of Outerwall, Inc., from September 2009 to December 2010. From July 2007 to March 2009, he held various roles at Potbelly Sandwich Works, LLC including Senior Vice President of Development and Vice President of Finance.

Competitive Landscape

The competitive landscape that Papa Murphy’s faces is fierce and extraordinarily saturated. Striving to differentiate and capture value from competitors will be a key struggle for Papa Murphy’s going forward.

Market Size and Characteristics

The food industry is one of the most competitive in the world. It is also one of the largest, with thousands of firms competing for a share of a market that is estimated to be as much as $4.6 trillion. Within that, pizza is also extraordinarily competitive, with 61,269 pizza companies fighting over the $39 billion pizza market. Of those $39 billion dollars, about 40 percent of them are taken up by the top four pizza chains in the world: Pizza Hut, Domino’s, Little Caesars, and Papa John’s respectively. This leaves the remaining 61,265 companies in the pizza industry to squabble over the remaining 60 percent of the market, Papa Murphy’s being one such company.

Papa Murphy’s is the fifth-largest chain in the US, but that’s a distant fifth. It has less than one third of the number of locations as its nearest competitor, Papa John’s, with only 779,730 locations in 2013 in comparison to Papa John’s almost 2.5 million

However, to be more specific, the market for pizza includes more than just the traditional parlor or even the Papa Murphy’s-style take-out. Frozen pizza is a large component of that $39 billion figure, making about $5.5 billion of that.

Competitive Firms

As mentioned above, Papa Murphy’s certainly has many competitors. While it is certainly not insignificant in the realm of pizza as a whole, Papa Murphy’s is a giant when it comes to the take-and-bake model.

Its largest competitors when it comes to this specific realm of the pizza market are grocery chains. Although there are a smattering of pizza chains that follow this model, such as Figaro’s Pizza and Nick n Willy’s Pizza, the real competitors to Papa Murphy’s are Walmart and Kroger. Both of these grocery giants sell a plethora of convenient, fast, and inexpensive pizzas. They have more locations than Papa Murphy’s, often cost less, and provide the added benefit of allowing the consumer to complete other shopping alongside.

The main differentiation factors that Papa Murphy’s has against these grocery chains are twofold. First, Papa Murphy’s allows customers to customize, and second, they emphasize freshness. Both of these elements will be discussed further in the “Key Competitive Advantages” section.

Porter’s Five Forces Analysis

When examining the competitive landscape that a firm operates within, it is helpful to use the Porter’s Five Forces analysis model. As the philosopher Nietzsche once said “Never conceal from yourself a thought that may be thought against your own thoughts.” That can be well-applied in business, making sure that a company can find, analyze, and mitigate threats against its own business model and core competencies, or “thoughts.”

Rivalry Among Existing Competitors

As explored briefly above, the rivalry among existing competitors in the pizza industry in general is fierce. This is further exaggerated in the specific competition that Papa Murphy’s faces from grocery chains offering take-and-bake pizza. Grocers are notorious for low profit margins, relying on the bulk of sales to make a solid net income. If customers in this industry are won on cost, then, then Papa Murphy’s has some extreme competition from larger, more omnipresent companies like Walmart.

Threat of New Entrants

The threat of new entrants is probably the least concerning threat against Papa Murphy’s. That is not because it is unlikely that another firm will enter the space; on the contrary, it is almost guaranteed that several new pizza companies will start this week or month alone. It is perhaps because of that bulk entry that new entrants aren’t particularly threatening. There is already so much competition in this industry that new entrants will likely find it inhospitable. When you also adduce the

extraordinarily low success rates for restaurant entrepreneurs, it is unlikely that new entrants will pose any significant threat.

Bargaining Power of Buyers

The bargaining power of buyers is of slightly more concern. Although buyers can’t directly bargain with Papa Murphy’s for a better price, they can all too easily take their business elsewhere and save money. Although Papa Murphy’s is competitive in its pricing model, it simply cannot afford the inexpensive nature of a take-and-bake grocery store pizza. If customers are not won to Papa Murphy’s for the quality of the pizza, if they are instead won by low cost, then they will be quickly lost to cheaper grocery store pizzas.

Bargaining Power of Suppliers

The bargaining power of suppliers is also something to consider thoroughly, but not unduly concerning. The main reason that it is not too concerning is that Papa Murphy’s does not rely too much on suppliers and that it has many options to choose from. Although ingredients for pizza are sourced from outside suppliers, that’s really the main thing that could be available for bargaining and profit pressure. Because franchises are built and maintained independently, costs such as building of locations are minimal for Papa Murphy’s.

Threat of Substitute Products or Services

The threat of substitute products or services is very significant. Although Papa Murphy’s works tirelessly to distinguish its pizza as especially fresh and particularly good, in reality, it is just pizza. To many, if not most, potential customers, a pizza is pretty much a pizza, and all of the Papa John’s and Papa Murphy’s of the world get a bit mixed up. As such, there is little brand loyalty. Whatever is most convenient, thought of as pretty good, and inexpensive will likely be the destination of choice for a pizza. Because of its moderately-unique take-and-bake approach, however, Papa Murphy’s is available to capitalize in a fairly exclusive way upon the purchase scenario that requires a pizza to be baked in the home.

Competitive Advantages

Papa Murphy’s has three main competitive advantages that it uses to differentiate itself from the competition in the pizza industry. These are its emphasis on freshness, its unique usage situation, and its lower costs resulting from its unique model.

Freshness

In an increasingly quality-food-focused economy, being fresh is a must. Within the take-and-bake pizza industry, almost all competitors to Papa Murphy’s utilize frozen ingredients. This lowers the quality of the end result (or at least the customer has been told to believe this). Papa Murphy’s differentiates itself by emphasizing the ingredients in its pizzas, such as its vegetables that aren’t ever actually frozen.

Unique Usage Situation

The second thing about Papa Murphy’s that makes it competitive in a bloated pizza market is its unique usage situation. Delivered pizzas are generally fresh, already cooked, and somewhat comparable in price. Going to a pizza parlor allows for a fun night on the town at a restaurant. What, then, does Papa Murphy’s provide? Papa Murphy’s does not have the convenience of a delivered pizza nor does it have the excitement of going to a restaurant attached to it, but it does allow the customer to take part in the baking experience while allowing customers to freeze and save the pizza until it is needed. This is not an extraordinarily large unique usage situation, usually another form of pizza is acceptable, but it certainly fits within a niche market well, and if Papa Murphy’s can capitalize on that uniqueness, then it will be driven closer to success.

Inexpensive

Although Papa Murphy’s is generally comparable to other widely-available pizza chains, it’s actually significantly less expensive than most of its top rivals. Among the top five pizza places by size (Pizza Hut, Domino’s, Little Caesars, Papa John’s and Papa Murphy’s). Of those four competitors, Papa Murphy’s is significantly cheaper than all of them except Little Caesars. The price difference for a large pepperoni pizza at any of these places ranges from $1-3 dollars. When factored into the price of Papa Murphy’s pizza, that’s as much as about 25 percent of the cost.

While this difference won’t cause customers to take out a second mortgage by going to Pizza Hut instead, it does allow competitive advantage when working to gain mid-range price sensitive consumers. The very most thrifty pizza consumers will likely go to a chain like Little Caesars that is extraordinarily inexpensive (less than half the price of any of these other chains), but certainly many people find that Little Caesars can produce a pizza for $5 because it really tastes about like eating a $5 bill. For customers that want a higher-quality product, but don’t want to pay extra to have their pizza cooked and delivered for them, Papa Murphy’s is a sweet spot.

Quality of Company Financials

In general the financials of Papa Murphy’s appear very sound and respectable for their industry. However, revenue growth and return on equity are of concern.

Receivables

It may not at first be apparent that Papa Murphy’s has many receivables. As a retailer mostly to individual consumers, it doesn’t have many receivables. However, there are certainly some receivables from other sectors. According to the 2015 Papa Murphy’s 10-k filing, “ Accounts receivable consist primarily of (a) amounts due from franchise owners for continuing fees that are collected weekly, (b) receivables for supply chain vendor rebates, (c) subleased retail rents, and (d) other miscellaneous receivables. Accounts receivable are stated net of an allowance for doubtful accounts determined by management through an evaluation of specific accounts, considering historical losses and existing economic conditions where relevant.”

So, while Papa Murphy’s doesn’t have as many receivables as a manufacturer or some other type of company, this is still a very-present element to consider.

The level of receivables that a company such as Papa Murphy’s has can be very indicative about the health and the success of the company, as such it is a key financial element to scrutinize when conducting an investment analysis. Mercer Capital explains here further about a couple of key things that can be found from looking at company financials:

“Receivables on an upward trend can be the result of rising sales, or can be an indication of slow collections, or an acceleration of future sales. If a company’s revenues are growing rapidly, it naturally follows that a higher level of receivables can be anticipated, which is positive. However, a high level of receivables can also be an indication of a longer collection period which can be caused by a number of factors including internal organization problems (the absence of a collections person or department), factors related to the customer base which may be slowing payments (such as bankruptcies or financial difficulties), or an economic slowdown in general. The company could also be accelerating future revenue by offering incentives and price cuts to customers if purchases are made early. One of our recent clients with increasing receivables noted that it was a result of a combination of factors including rapid growth, the lack of proper

administrative attention to receivables and a large account with a government agency that tended to be slow pay.”

So the first question to consider to address these concerns is are the receivables Papa Murphy’s has even increasing. Then, if they are, or even if they are decreasing, how are they changing relative to sales? Because Papa Murphy’s has only been public for two years, there is only one comparison data set to consider.

As it turns out, the answer to that first question is no. This “Allowance for Doubtful Accounts” entry that Papa Murphy’s includes its accounts receivables under has decreased from just $60,000 in 2014 to $34,000 in 2015. Since gross revenues increased by more than 20 percent over that time period, the receivables accounts are decreasing in correlation with an increase in sales, meaning that receivables are really not of much consequence to Papa Murphy’s, especially not of negative consequence.

Inventories

There are a few main trends that can be found by looking at the inventory levels of a company. Here are several main ones:

● High growth companies tend to have rapidly-swelling inventory to accommodate exploding sales

● Large levels of industry, especially perishable inventory such as Papa Murphy’s franchises might have, can be a bad sign, signaling that there is inefficiency or not demand for the inventory

Just looking at the level of inventory that a company has on the balance sheet is incomplete, though. To get a better idea of how inventory is flowing through the company, inventory turnover ratios must be used. In 2014, inventory was $640,000. This jumped to $868,000 in 2015. This 36 percent increase may seem like a lot, but as a percentage of sales, that increase is only about 6 basis points, a figure not worth considering greatly.

Looking at the inventory turnover confirms this. In 2014 there was inventory turnover of about 152 and an inventory turnover period of about 2.4 days, annualized. In 2015 there was inventory turnover of about 138 and an inventory holding period of 2.6 days. This slight increase may be an indication of decreased efficiency, but says little about the overall health of the company.

Because there has not been a significant change in the brief time period available for analysis, little can be drawn from this information. Inventory is a relatively-small

part of Papa Murphy’s, and so doesn’t hold great weight in providing information on the financial health of the company.

Fixed Assets

Fixed assets are important to look at largely because they can be a good indication of growth. If a company is growing rapidly, then it will likely be increasing its property, plant, and equipment as well as other fixed assets significantly. If a company’s sales appear to be growing, but fixed assets are not increasing, then this is an indicator of one of two things; first, Papa Murphy’s is becoming more efficient with its current fixed assets, using what it has to drive greater sales, or second, that Papa Murphy’s is delaying large capital expenditures.

The fixed assets of Papa Murphy’s increased dramatically from 2014 to 2015, increasing from 12,120 to 21,261. This 75 percent increase is almost triple the growth in sales. This is a slightly puzzling figure, that has a couple of possible explanations. First, this could be because previous capital expenditures towards fixed assets were delayed until recently, so this growth is just catching up with past growth in the company. Second, this could be because Papa Murphy’s expects that growth to accelerate soon and wants to be prepared to scale effectively. The latter is, of course, the more promising of the two alternatives for the prospects of the company, but without deeper analysis in other financial measures, it is difficult to find which of these two is correct.

Revenue

One of the most important financial elements to look at in a company is its revenue changes. Strong, consistent growth can be a good sign, although past performance is of course not an indicator of future performance. Revenue growth for Papa Murphy’s, however, has not been exponential. It has been merely linear. Over the past five years, a linear trendline for revenues tracks growth quite closely. Here are the annual revenues reported by Papa Murphy’s:

Looking at the percent change growth annually is far more insightful.

However, the steep drop that can be seen here in annual growth does deserve some justification. First, 2011 was in the immediate time period of a recent merger. The sales of the merged company were not yet added, and so the smaller number was easier to improve upon. Further, growth cannot always continue at 60 percent annually. Perhaps Papa Murphy’s has left the stage where such explosive growth is possible. More recently, however, a positive, encouraging trend presents itself, with revenues growing at an increasing rate over the past three years.

Pension Plan Expenses

Pensions are a big consideration in many companies. It is important to be aware of future obligations for large expense programs like an employee pension. Papa Murphy's has no such program, though, so pensions are not an issue.

Gains on Asset Sales

When companies liquidate or sell off main assets, it can be cause for concern. These sales inflate the income of a business while acting as a harbinger of business downturn. Companies in growth stages should be buying assets, not selling them off, and so examining growth or lack thereof is essential.

As can be seen from this chart depicting Papa Murphy’s capital expenditures over its publicly recorded history, there is a generally upward trend in expenditures. This is a good thing for two reasons. First, it is good because it means that revenues aren’t artificially inflated by selling off assets. Papa Murphy’s doesn’t need to finance itself by taking drastic selloff measures. Second, a growth in capital expenditures often means a growth in the company. It often means that Papa Murphy’s is expanding its assets to meet voracious customer demand and growth in its franchising.

However, that second reason needs to be examined further. It is also possible that this capital expenditure increase correlates to a higher level of inefficiency. It could be that Papa Murphy’s is simply doing less with more or even just doing a little bit more sales with a lot more assets. These are negative possibilities, and to see if they are a threat, capital expenditures must be looked at from a perspective that incorporates sales and actual growth in the number of franchises that it has.

When looked at as a percentage of sales, it is clear that capital expenditures are not a huge problem. While the expenditures are increasing as a raw value, they have actually decreased significantly over the last five years.

What is remarkable about looking at the capital expenditures in context of the number of Papa Murphy’s franchises is its similarities to looking at capital expenditures as a function of sales. The disturbing difference, here, though, is that franchises are not growing as fast as sales. While this can be interpreted as a good thing, showing that Papa Murphy’s is doing more sales per location, it is also cause for concern because the capital expenditures per location necessary to facilitate those sales have grown quickly as well.

The other thing that is worrisome about this chart is the growth in the number of franchises. As can be quite clearly seen here, it is basically a flat line. As mentioned in the “Goals” section of this report, if growth in the number of franchises for Papa Murphy’s was continuous over its lifespan, then about 40 new franchises opened each year. The problem is, however, is that that growth shouldn’t be constant. I order to be a really solid, competitive investment, then it should be growing exponentially, and that just isn’t the case. Each year, an average of 58.75 franchises is opened. This is definitely above 40, but it doesn’t quite show the exponential curve that would be exciting as an investor.

Compressed Margins

The next financial looked at here is the change in margins over time. If net income margins as a portion of sales have decreased over time, this is a bad sign. Overall, companies should strive to become more profitable on their sales over time, not less. With this, Papa Murphy’s has done phenomenally, although that may not be saying much. Percent net margin for Papa Murphy’s has increased dramatically since it’s low point in 2013 of -3.20 percent. The ability to become relatively profitable in such a short time is impressive and should be given credence if this past performance is taken as any indicator of future performance.

One possible negative side-effect of this increased profitability, however, could be an increased price for potential investors. In order to see if increased earnings have led to an increased price for future equity holders, it is necessary to look at the price to earnings ratio over its time as a public company.

The earnings, however can’t be used in determining this because they were negative for the first few years of the company. As such it is necessary to use the EBITDA value, which provides a similar perspective on the company. As can be seen from this chart, however, large profitability growth rates have not led to a larger price for prospective equity holders, excepting for the anomalous spike in the second quarter of 2015. This variance between the price and the profitability may be an indicator that now is actually a good time to invest in Papa Murphy’s.

DuPont Comparison

The DuPont comparison method is one of the most commonly-used methods for analyzing the financial health of a company. It is the next tool that will be used for figuring out how the financial statements show Papa Murphy’s health. The DuPont comparison method has three parts as shown in this equation:

The first part indicates a company’s profitability, showing the level of net income that a company can gain off of its sales. The second part indicates a company’s efficiency, showing how many sales it can gain off of a given level of assets. The final element shows the leverage that a firm exhibits, determining what level of financing of the company’s assets were completed by equity. Together these three elements combine to provide valuable insight into the health of a company from a financial standpoint.

All of this financial analysis is all good and well, but without comparison to comparable firms, it is relatively hollow. In order to fully grasp the financial performance of Papa Murphy’s in its competitive landscape, it must be compared to its competitors. One of the most comprehensive comparison metrics that can be easily conducted is the DuPont comparison method, which looks at the profitability, efficiency, and leverage of a company. Each of these three elements of the DuPont framework will be discussed below, but first some explanation of the comparison firms used must be given.

Comparison Firms

Before delving into which comparison firms are actually used here, it is beneficial to be aware of the postive and negative things about using comparison firms in analysis of a company like Papa Murphy’s.

Positives● It is easy to make calculations because comparison firms are generally public

with a lot of data● Using comparisons helps provide a benchmark

○ Otherwise there would be no adequate measure of success

Negatives● These comparisons can be influenced heavily by market conditions● Non-comparable factors between the company may actually be the cause of

differences○ Correlations can easily be confounded

● It can be very difficult to even find good comparable companies● When companies are thinly traded things become less accurate

Despite the many potential drawbacks of using comparable companies in analysis, it is still necessary to use them to gain an advanced perspective on the landscape that Papa Murphy’s operates within. It is, however, good to keep in mind the negative elements that doing so can contain.

Now for the actual comparisons. Pizza Hut, Domino’s, and Papa John’s are the three comparison firms analyzed in this DuPont framework. This was mentioned earlier (except that Little Caesars was included previously, but not here because it is not a publicly-traded company), but because choosing good comparison companies is so important, here is further explanation why these four pizza companies are included:

● They are all public.○ If this were not the case, there wouldn’t be adequate data for them

with which to make meaningful comparisons. ● They are all industry leaders.

○ As the four largest pizza companies in the US, these companies represent where Papa Murphy’s wants to be.

○ These industry leaders are examples that Papa Murphy’s should strive to emulate.

● They all compete directly.○ All four of these companies operate within the same US pizza market. ○ They each do have different niches within that market, however.

● They are all large. ○ It would be ineffective to compare Papa Murphy’s to a pizza company

that only has $20 million in annual revenues. Such a company is at a different point in its life cycle.

○ Even though these four are significantly larger than Papa Murphy’s, they are the closest larger companies.

However it must also be considered that Pizza Hut isn’t an individual company. It is owned by YUM! Brands, which also owns KFC and Taco Bell. This variance in type of food marketed certainly detracts from Pizza Hut’s quality as a comparison company, but it should still be kept because it is ultimately in the position that Papa Murphy’s wants to become, the top pizza company in the US. In order to do this, Papa Murphy’s should consider the performance of Pizza Hut, even if that means considering the performance of other franchise brands alongside the pizza business.

These are all good reasons to consider when choosing comparison companies for Papa Murphy’s, but further analysis within the DuPont framework itself will help determine just how close these companies are to each other and to Papa Murphy’s across the variables of profitability, efficiency, and leverage.

Profitability

The profitability level within the company is shown by the net income that it derives from it sales, as stated above. The profitability level within a firm is an important metric to use to find the effectiveness a company demonstrates in turning its sales into actual profits. If a company is unable to make this jump between sales and net income, with a lot of intermediate expenses ebbing away the revenues of a company, then it will not be a good company to invest in.

The profitability levels as found in the DuPont matrix are included here for the three comparison firms and Papa Murphy’s itself. The data were extracted from the most recent 10-k forms for each of these companies.

As can be seen above, Papa Murphy’s isn’t doing well. It is less profitable than its comparable companies by a significant margin. This could be due to the fact that it is younger than each of the comparable companies except Papa John’s. Domino’s and Pizza Hut were both founded just around 1960, and so they have a 20-year head start on driving increased profitability. However, it is still not a particularly good sign that Papa Murphy’s is so far behind its competition in profitability.

Efficiency

The next element within the DuPont framework is the efficiency of a company. The efficiency a company exhibits is measured here as the amount of sales that it can generate for every dollar of assets that it has. This is very important for investors to know because investors are essentially providing that dollar of assets, and the level of return that can be gained off of that dollar can be measured through sales.

The story told in the efficiency ratios exhibited by each of these companies is very different from that told in the profitability ratio. Papa Murphy’s is the clear winner in this category, earning about 44 cents per every dollar of assets invested in assets. This is almost double the efficiency ratio of the nearest company.

This high efficiency ratio indicates that every dollar an investor contributes to Papa Murphy’s would be well spent, generating annual sales almost half the worth of the contribution to the assets. This is an important metric leaning in favor of an investment in Papa Murphy’s.

Leverage

The leverage of a company is one of the trickier elements of the DuPont framework to interpret. Too much leverage can be a very bad thing for a company; if interest payments become so extensive that a company’s excess income is unable to cover payments, then liquidation or other drastic financial restructuring measures may be taken within the company to make necessary payments.

On the other hand, however, too little leverage can also be a bad thing. A company that is not using at least some leverage to finance its operations is missing out on the possibility of maximizing its revenues and profitability to shareholders. Where the distinction between too much and too little leverage lies is unclear. It is this ambiguity that makes leverage intractable to interpret.

In the DuPont method, however, leverage is measured by finding the amount of assets per every dollar of equity. It essentially finds how much of the company’s assets were financed by equity. The results for the three comparison firms and Papa Murphy’s are as follows:

This chart is quite stark in its differences. Papa Murphy’s and Domino’s are both close to 2 or 3, while Papa John’s and Pizza Hut are both closer to about 10. This means that Papa Murphy’s is actually quite low on its leverage in comparison to the average for the comparison firms. Depending on how this is interpreted, this could either be a negative or positive sign for potential investors.

Cumulative ROE

All three of these elements within the DuPont model combine to find the ROE, or return on equity, which measures the amount of net income for the equity invested in the company. Since potential Papa Murphy’s investors are ultimately trying to find the amount of net income that they will get for each dollar of equity invested in the company, this is by far the most critical element within the DuPont framework to examine. The results for the considered companies are included here:

As far as the return on equity that each company provides, Papa Murphy’s is really the outlier. It has an extraordinarily low return on equity. This could be a combined result of its low profitability and high equity financing, as shown above. This low ROE should not disqualify Papa Murphy’s as an investment, but should factor heavily into the price that an investor would pay for equity within the company.

Quality of Business Model

Papa Murphy’s business model has key strengths in its focus on fresh, its non-delivery emphasis, and its unique usage situation. Key weaknesses that the business model faces include that it doesn’t deliver pizza, it isn’t either the cheapest or the most expensive, and that it requires effort from the consumer to bake.

Although the actual results of a business model, as found in a company’s profitability and through its actual revenues, are very important, it is also useful to look at the theoretical foundations that a business has; if how it is driving the results that are manifested is unclear, then the all the numbers in the world shouldn’t be enough to convince investors that the business is a good idea.

Some of the key strengths and weaknesses in its business model that Papa Murphy’s manifests will be covered here and then compared with the comparable firms decided on previously.

Strengths

Papa Murphy’s Focuses on Fresh

Focusing on fresh is a major advantage in a modern, health- and environmentally-conscious economy. Consumers care more than ever about the freshness of their food, as freshness is increasingly associated with the quality of the product in consumer mindsets.

However, Papa Murphy’s doesn’t just proclaim freshness; it shows it. Consumers are easily able to see that their pizza is assembled before their eyes as they visit Papa Murphy’s. Because they can see the ingredients being added to their pizza they are convinced that their pizza is fresh. That visual and interactive nature is invaluable in persuading customers that their pizza is fresh.

Papa Murphy’s is Based on Pick-Ups

Papa Murphy’s doesn’t center its business model around delivering pizzas. Each of its competitors, except for Little Caesars, is focused on delivering its pizzas to customers. Papa Murphy’s doesn’t do this. Customers pick up the pizzas in Papa Murphy’s franchises. This is a valuable strength to Papa Murphy’s business model because Papa Murphy’s then doesn’t have to pay for delivery drivers or company vehicles. It doesn’t have to worry about getting late on deliveries. It doesn’t have to

pay for car liabilities. Everything is just much less expensive and much more cost-effective as a result.

Papa Murphy’s Provides a Unique Usage Situation

Because Papa Murphy’s pizzas require baking on the part of the consumer, they are unique among the main competitor pizzas. This act of cooking that Papa Murphy’s elicits in its consumers provides unique situations where Papa Murphy’s is the pizza of choice. Times and places where more interactivity and familial involvement are desired are primarily served by Papa Murphy’s.

Weaknesses

Papa Murphy’s Doesn’t Deliver

Many people that order pizzas don’t want to leave the house. They don’t want to get ready. They don’t want to interact with people (including the pizza-delivery man, and lucky for them Domino’s recently developed an automated pizza-delivery car), and they don’t want to have to deal with the hassle of getting up off the couch. This is a prime target market for all of Papa Murphy’s competitors.

Because of the Papa Murphy’s Take “N’ Bake business model, this target market is inaccessible. For potential customers in this situation, Papa Murphy’s doesn’t even make the list for pizza providers. Although this potential weakness allows Papa Murphy’s to make its market more specific, it is a major drawback in the overall dollar potential of its market.

Papa Murphy’s Isn’t the Cheapest (or the Most Expensive)

As described above, most people don’t want to drive to go get a pizza. They don’t want to take the effort. But when they do, where does Papa Murphy’s fit in? It isn’t a $5 pizza that can be quickly picked up from Little Caesars. On the other side of things, it isn’t the $20 premium pizza at a luxury pizza parlor downtown. It is neither cheap enough to be a quick commodity nor is it expensive enough to be turned into a food event. It just lurks in the mediocre middle without much to recommend it on either side.

Papa Murphy’s Takes Effort

The short story of this is that people who want pizza of the quality that Papa Murphy’s delivers don’t want to take the effort to go get pizza at a fancy restaurant and they don’t want to have to move and take effort. Papa Murphy’s requires customers to go get food of a quality that is normally delivered to them.

However, that’s not the end of woes that pizza lovers have to face when purchasing from Papa Murphy’s. To add insult to the injury of having to go pick up the pizza, it must then be cooked. Many pizza-buying millennials don’t even own ovens, and the rest of people that do likely don’t want to have to use them.

Waiting to cook a pizza after already taking a significant amount of time to go get that pizza really just is not a very pleasant thing in an economy that prizes instant gratification. With the speed at which everything from packages to broccoli can be delivered to consumers’ doorsteps, failing to have that speed and convenience must be used as a definitive differentiating factor or it will likely kill Papa Murphy’s or just limit its market size.

Competition Comparison

Strengths

Competitors to Papa Murphy’s have many of the strengths that Papa Murphy’s has. All of them place an emphasis on freshness to some degree, even if this isn’t quite to the highly-visible level that Papa Murphy’s provides. Little Caesars beats Papa Murphy’s on the price, but Papa Murphy’s still has an advantage over Papa John’s, Domino’s, and Pizza Hut. The one strength, then that Papa Murphy’s exhibits the most independently of its competitors, then is its Take ‘N’ Bake, pickup and cook-up model. Not having to cook or deliver the pizzas saves Papa Murphy’s costs that its competitors face and should ultimately be reflected in the bottom line.

Weaknesses

Central to the weaknesses that Papa Murphy’s exhibits is the laziness that it faces in consumers. Papa John’s, Domino’s, and Pizza Hut all cater to this laziness with deliveries and pre-cooked pizzas. Little Caesars is the only other competitor that has a pickup model, but it’s lower cost even than Papa Murphy’s and the fact that its pizzas are already cooked justify this. Failing to accommodate an on-demand economy is not a weakness that any of Papa Murphy’s competitors face.

Non-Valuation Investment Thesis

Investment Thesis

Not considering the valuation, investing in Papa Murphy’s is not a good idea based on the information found in this report.

Justification for Thesis

Justification for this investment thesis is found here, sorted into the sections mirroring the report thus far.

Competitive Landscape

The pizza industry is saturated. With myriad competitors involved in every niche within the industry, Papa Murphy’s does not have a truly original take on pizza. Nor is it the best, or the cheapest, or the fastest, or the coolest. It really can’t differentiate itself absolutely in such a packed industry.

Bargaining Power of Buyers

Although Papa Murphy’s doesn’t have to deal with customers haggling over prices on an individual basis, customers easily can find cheaper alternatives to Papa Murphy’s. With the advent of the $5 pizza, price-sensitive buyers can find better alternatives to Papa Murphy’s with ease.

Threat of Substitute Products or Services

As mentioned before, there really is little way for Papa Murphy’s to meaningfully differentiate itself as a pizza provider. Because of this, there is little to stop other companies from becoming a substitute pizza. Even if Papa Murphy’s Take ‘N’ Bake model was found to be effective in differentiation, there are already smaller chains that employ the same model. If found to be lucrative enough, exact copycats will spring up with little legal repercussion.

Revenue Growth as a Percentage

Papa Murphy’s revenue is undeniably growing. It is increasing steadily year over year, but as a percentage of sales, it’s not increasing by much. The gains that it does exhibit certainly aren’t the exponential, high-powered growths that would truly make Papa Murphy’s lucrative as an investment opportunity.

Franchises Added

The number of franchises added annually is certainly significant, but as with revenue growth, isn’t quite at the level that would be expected from a company that considers itself to be “high-growth.” There just isn’t enough expansion to justify its worth.

Profitability

Papa Murphy’s just isn’t that profitable. In comparison to its main competitors, Papa Murphy’s isn’t able to develop as much net income as a function of sales as it should be. There are certainly good reasons for this, but in the end, the bottom line is not affected nearly to the degree that it should be relative to increases in sales, making Papa Murphy’s a less profitable option for investment than its high-profitability competitors like Domino’s and Pizza Hut.

Return on Equity

Papa Murphy’s just doesn’t generate that much net income for the equity that is invested in the company. Something in its operations is consuming profits disproportionately, and this is a negative element in considering Papa Murphy’s as an investment.

Papa Murphy’s Doesn’t Cater to Lazy Consumers

Papa Murphy’s doesn’t deliver or pre-cook its pizzas, and this means that the customer is left waiting. Customers have to become actively involved in the pizza purchase and consumption process when purchasing from Papa Murphy’s. This is distinct from its competitors and presents a reduction in Papa Murphy’s total maximum market potential.

Objections to Thesis

There are, however, many good things about Papa Murphy’s as a company that need to be considered before fully rejecting Papa Murphy’s as an investment option.

Board of Directors and Management Team

The board and management team for Papa Murphy’s are some of Papa Murphy’s greatest strengths. Many of the members of this staff are actively involved with competitors, particularly at Domino’s and Pizza Hut. This industry experience will help align Papa Murphy’s with the results that have been demonstrated in these other companies.

Threat of New Entrants

Papa Murphy’s doesn’t need to worry that much about new entrants simply because there are already so much of them. This isn’t so much a strength to Papa Murphy’s as it is a lack of having a potential weakness.

Freshness

Papa Murphy’s focus on freshness is very valuable. In this area it is on top of market trends and consumer desires. To be fresh is to be desirable, and Papa Murphy’s is able to clearly convey its freshness to the consumer through its visible pizza-assembly process.

Unique Usage Situation

Although it is hard to pin down an extraordinarily large market for which Papa Murphy’s provides a unique usage situation, there are certainly times when involvement in the cooking process is a value-added element to Papa Murphy’s business model.

Inexpensive

Although it is neither the cheapest nor the most expensive, being on the relatively cheap end of the spectrum makes Papa Murphy’s accessible to the market of young families that its unique usage situation often seems to target.

Receivables

Papa Murphy’s has little trouble with its receivables. Since this can often be a problem with companies, failing to have this problem works towards an investment in Papa Murphy’s.

Inventories

This is the same reasoning as “Receivables.”

Revenue Growth

Although this level of revenue growth that Papa Murphy’s exhibits can easily be interpreted as a weakness, it certainly isn’t terrible. If for no other reason than that the growth is significant, although not what you’d expect from a high-growth company, Papa Murphy’s is decently competitive as an investment.

Franchises Added

This is the same reasoning as “Revenue Growth.”

Percent Net Margin

This is possibly the strongest argument for Papa Murphy’s as an investment opportunity. Papa Murphy’s net margins have been increasing, and as was later discovered, its price relative to these increased margins have not been increasing.

Efficiency

Papa Murphy’s is undeniably efficient in its operations. With a high level of sales per dollar of assets it has, Papa Murphy’s is able to convert its assets readily into increased revenues, and this is valuable in any industry.

Papa Murphy’s is Focused On Pickups

Although this is also a great weakness, the lower costs associated with not sponsoring deliveries for its pizzas or bothering to pre-cook them can be helpful in limiting operating expenses.

Although all of these benefits definitely make Papa Murphy’s advantageous as a business, each of these small positive items are heavily outweighed simply by the fact that Papa Murphy’s really isn’t growing as much as it should be, and the growth that it does exhibit isn’t driving satisfactory returns on an investment. As such, the investment thesis stands that Papa Murphy’s is not a good investment at this time.

Non-Valuation Investment Risks

It is important to look thoroughly at any risks to an investment. However, many of these risks have been covered above, particularly in the following categories:

● Competitive Landscape● Competitive Advantages● Quality of Company Financials● Quality of Business Model

Because risks relating to each of these categories have already been covered extensively above, the only further investment risks that will be considered here are the risks posed by uncontrolled business inputs.

Uncontrolled Business Inputs

Key uncontrolled business inputs are economic risk, input price risk, liquidity risk, and food illness risk along with the slew of negative effects that food-borne illness brings to a company.

The uncontrolled business inputs look at a variety of risks that face a company over which that company has no control. Some of these main risks are covered here as well as why they are or why they are not a major concern to Papa Murphy’s.

Intellectual Property Risk

The intellectual property risk that Papa Murphy’s faces is pretty much negligible simply because it is hard to have intellectual property in the pizza industry in the first place. Almost everything has almost been done, and so it doesn’t pay to try to defend any intellectual property. Doing so would be like stemming a tide with a sand castle.

Merger and Acquisition Risk

The risk of a merger or acquisition is a little bit more present. However, there is currently little expectation of any such merger or acquisition occurring in the near future. It is always a possibility, however, as is evidenced by Papa Murphy’s own past.

Economic Risk

Economic risk is significant for Papa Murphy’s. Although pizza is not a luxury good, it is a normal good. As such, if a recession occurs, people will eat out less. Fewer patrons will visit Papa Murphy’s restaurants. Less pizza will be bought and Papa Murphy’s will suffer for it.

Technological Risk

There is little risk of technological risk in the pizza industry, since pizza isn’t a technology. However, it is always possible that expenses will be incurred by new pizza-production machinery coming out that must be purchased to remain competitive. This risk is slim, however.

Reputational Risk

Reputational risk is a very real concern. Reputation as a pizza chain or any food chain is generally lost most dramatically through food-safety concerns. If such problems are avoided, however, then Papa Murphy’s has little risk.

Sustainability Risk

The sustainability risk for Papa Murphy’s is very small. The business model has already been proven, and since it has continued to exist for over 30 years now, it is likely that Papa Murphy’s can at least sustain itself in the near future.

Capital Availability Risk

The risk of not having capital available to finance funding needs is also small for Papa Murphy’s. This is because Papa Murphy’s itself is becoming more and more profitable. It is becoming more readily able to procure its own financing through retained earnings and plowback of profits. Whatever capital it needs can likely be financed through these channels.

Interest Rate Risk

The interest rate has little to do with the demand for or production of pizza unless the interest rate affects the risk of economic collapse. Then it becomes a concern of the form discussed above in economic risk.

Currency Risk

The risk of currency fluctuations is minimal, but given that Papa Murphy’s is working to expand internationally, it could become a larger problem. Papa Murphy’s just needs to make sure that its prices always reflect the values it intends them to.

Inflation Risk

The risk of inflation is likely, but when it occurs is not going to be severe. The main costs associated with inflation are the menu costs associated with replacing prices and the cost of customer business if customers leave when they find that prices are going up with inflation.

Liquidity Risk

The risk of limited liquidity is very real to Papa Murphy’s. Much of Papa Murphy’s value is tied up in property, plant, and equipment. Should Papa Murphy’s need to access that value at short notice, it will likely have to incur a serious monetary penalty to do so.

Fraud Risk

The risk of fraud is very real to Papa Murphy’s but fairly limited in scope because much of the revenue that Papa Murphy’s receives goes through franchisors first. That combined with the fact that there is limited cash to begin with in a pizza business means that the risk of fraud is low.

Tax Risk

The risks posed by taxes are moderate in severity. Depending on the future president, corporate taxes could either raise a lot or decrease a lot, making the risk quite significant at this point.

Demand Risk

The demand risk for pizza is small. What little risk there is that pizza demand will fall is largely tied to economic risk; pizza has been and will likely continue to be a staple in the American diet.

Market Competition Risk

The market competition risk that Papa Murphy’s faces is extraordinary. There are competitors engaging in price wars, competitors trying to steal Papa Murphy’s

customers, and even competitors stealing some of the Papa Murphy’s brand name (looking at you, Papa John’s).

Customer Relationship Risk

The consumer relationship risk posed to Papa Murphy’s largely centers around the possibility of a food-borne illness. If Papa Murphy’s has an outbreak of some illness, then it will likely lose a lot of consumer trust and result in severely damaged customer relationships and profits. Chipotle has recently been a case study for just how badly a food-safety risk can affect relationships with customers, and through them the actual realizable profits a company exhibits.

Brand Value Risk

As with the customer relationship risk, a brand value risk is likely tied to disease outbreaks. Having such an outbreak can severely damage a brand’s value.

Publicity Risk

Once again, this risk, publicity risk, also focuses on the possibility of a food-illness problem. Without such a problem, Papa Murphy’s is unlikely to get much publicity, and that is generally a very good thing in the food industry.

Large Account Risk

Because Papa Murphy’s drives revenues through millions of small customers as opposed to a small number of customers worth millions each, the large account risk is very small.

Input Supply Risk

Input supply risk is a very valid risk to Papa Murphy’s. If the price of tomatoes or cheese were to increase even slightly, Papa Murphy’s would have to deal with lower margins and possibly even the pains of raising its prices.

Informational Security Risk

Informational security risk is a very real possibility recently. Even extraordinarily secure companies are liable to have their data breached at some point. If Papa Murphy’s does not take extreme measures to avoid having a data breach, then this risk could be easily realized.

Workplace Safety Risk

Pizza-making isn’t a very hazardous form of employment, especially given that there aren’t any delivery drivers at Papa Murphy's. However, it is always possible that an employee could be injured doing something as mundane as spinning dough. Perhaps they would get flour in their eyes.

Employer Liability Risk

Because the workplace safety risk is small, so too is the employer liability risk.

Liability Risk

LIability risk, like so many other of these risks is tied in great part to a food-illness outbreak. If there is e coli or norovirus in Papa Murphy's foods, then there will likely also be many liabilities and lawsuits.

Political Risk

The US, where Papa Murphy's is primarily based, is generally safe politically. However, depending on the president elected in upcoming elections, there could be a resultant variety of real risks to Papa Murphy's that should be resolved once a candidate is elected.

Earnings Model Key Assumptions

Sales Growth

The most critical part of this earnings model is the estimated sales growth. Because all of the other metrics of success and account items are based relatively to that sales growth, getting a good number is imperative to accuracy. The sales growth projection for this earnings model is simply the average of returns over the past five years. Looking at the revenue growth that Papa Murphy’s exhibits as a percentage of previous year’s sales supports this method of projection.

Although the revenue growth initially decreased significantly, it has leveled off over the past several years. As such, the early transition sales growth was not included in the average growth calculation, an assumption validated by Bloomberg as well when calculating sales growth year over year.

As a result, while the 23.4 percent figure of sales growth is an assumption, it is a good one because it is based firmly in historical data and expectations for the future.

Discount Rate

Choosing a good discount rate for a company is essential because that discount rate affects the present value of the firm’s future earnings and thus the expected value of the stock over time. The discount rate chosen for this project is 7 percent, which is roughly the average return on the US stock market over the past 50 years. This is a reasonable discount rate because, if not invested in Papa Murphy’s, invested capital has historically returned about 7 percent.

This is an inexact measurement, however. Different investors have different opportunity costs, and so to account for the various discount rates that could be chosen, included here are the results of changing the discount rate from that 7 percent. A large variety of discount rates are shown to account for the widest range of possible investors in Papa Murphy’s. Note that the current price used for Papa Murphy’s stock is for the close of April 11, 2016.

1 Percent Discount Rate


As can be seen from the significant variance of the market capitalization and price per stock share with different discount rates, picking an appropriate rate is essential for making good investment decisions. 7 percent is an assumption that proxies for an appropriate rate in this situation.

Average Percent of Sales

One other key assumption made in this earnings model is that each item looked at will stay the same as a proportion to sales in future years. This is of course going to be incorrect on some level, but the degree of incorrectness is the main concern.

One of the main metrics that is likely to change with respect to sales (and that will likely have large effects for the business resultantly) is net income. Net income as a function of sales has changed drastically over the life of the company, as can be seen in the chart below. This reduces the integrity of the data because the average percent of sales that an item has used in the past five years is unlikely to be the same as what it will use in the next five.

One of the main things that was done to accommodate the sporadic nature of net income in particular was to look only at the last three years. This eliminates consideration quite as far back and gets a more accurate view of what recent income change has looked like.

Current P/E vs. Forward P/E

The next critical assumption that was made in determining the end share price in 2020 based off of the net income over the next several years was that the current P/E ratio of 29.4 will remain similar to future P/E ratios. Using the current P/E ratio certainly has drawbacks in that it is guaranteed not to stay the same going forward, but it allows for a P/E based in fact, not in postulation.

Because the P/E ratio is not going to stay the same, it is useful to look at some of the possible variations that it could have, whether in compression of P/E or expansion. Several such scenarios are included here. The results are drastic, but it is beneficial to see the wide range of effects that a change in this ratio could cause.

P/E of 10

P/E of 15

P/E of 20

P/E of 25

P/E of 29.4

P/E of 30

P/E of 35

P/E of 40

P/E of 45

P/E of 50

Number of Shares Change

Another thing that could change the value of shares in the future is the number of shares in circulation. Were this to increase or decrease dramatically, the price of existing shares would fluctuate accordingly. This assumption, then expects that the number of outstanding shares will remain close to 16,942,932, as it was as of December 28, 2015.

Valuation Assessment

There are several main ways to look at Papa John’s current valuations. The main method is the market capitalization, but it is often useful to look at valuations through different methods as well, some rather experimental. Other valuation methods that will be conducted briefly here, then are the, the market capitalization to asset value ratio method, the employee number correlation method, the LinkedIn follower correlation method, the Facebook follower correlation method, the Twitter follower correlation method, the Pinterest follower correlation method, and the Instagram follower correlation method. Each of these methods along with assessment of their relation to the actual current market capitalization and reasoning why they could be inflated or deflated is included here.

Each of these valuation methods are based off of the three public competitors as chosen above, e.g., Papa John’s, Pizza Hut, and Domino’s. These valuation methods are followed by brief statistical analysis of a true mean valuation using these nonstandard methods as well as consideration of any possible outliers, if this found to be at all necessary.

Asset Value Ratio Method

The asset value ratio method is fairly self-explanatory in its naming. Essentially it takes the assets that a company has and then finds a ratio from the comparable firms between the assets and the market capitalization of the company. This is then applied to the initial firm, Papa Murphy’s to arrive at a market capitalization.

Process

The first step in completing this process is to find the level of total assets that Papa Murphy’s has. This is $275,471,000.

The next step is to figure out the necessary ratio to apply to that initial asset base by looking at the correlation between assets and market capitalization for the three comparable companies.

Pizza Hut

Market capitalization = $33,620,000,000Total assets = $8,075,000,000Market capitalization/total asset multiplier ratio = 4.16

Papa John’s

Market capitalization = $2,100,000,000Total assets = $494,912,000Market capitalization/total asset multiplier ratio = 4.24

Domino’s

Market capitalization = $6,860,000,000Total assets = $799,845,000Market capitalization/total asset multiplier ratio = 8.58

The next step in the process is to average these three market capitalization/total asset multiplier ratios, which yields 5.66. This is then applied to the amount of total assets found previously, $275,471,000, to yield a final valuation for the asset value ratio method of $1,559,165,860.

Relation to Current Market Capitalization

This valuation of about $1.5 billion is much higher than the $200 million market capitalization that Papa Murphy’s currently enjoys. If, for whatever reason, the asset value ratio method is more accurate at producing a firm valuation than the current market is, then Papa Murphy’s stock is a steal.

Why This Could Be Inflated

There are several reasons why this could be an inflated valuation:

● Papa Murphy’s is smaller.○ This may translate into a larger amount of assets to produce similar

results, as would be expected from economies of scale.● Papa Murphy’s just isn’t as efficient.

○ If Papa Murphy’s return on assets is not comparable to the three other companies, then it won’t be measured correctly here.

○ If it had a higher ROA, then it would require higher assets to achieve the same results and thus be worth less as a function of this method’s ratio.

Why This Could Be Deflated

There are several reasons why this could be a deflated valuation:

● Papa Murphy’s is even more efficient than its comparables. ○ This would mean that for the same level of assets it produces a higher

valuation and so should be worth more in market capitalization.

Employee Number Correlation Method

The employee number correlation method, as the name suggests, finds a valuation correlation between the number of employees has and its market capitalization.

Process

The first step in this process is to determine the number of employees that Papa Murphy’s has, which is 2,101.

Next it must be determined what level of market capitalization can, on average be given to each employee within the comparable firms. This is done by taking the market capitalization of the comps and dividing it by the number of employees each has.

Pizza Hut

Market capitalization = $33,620,000,000Number of employees = 539,000Market capitalization per employee = $62,375

Papa John’s


Domino’s


These ratios are then averaged to produce a level of market capitalization per employee equal to $65,002. This is then applied to the number of employees that Papa Murphy’s has, 2,101. This yields a final valuation using the employee number correlation method of $136,569,202.


This is actually quite a bit lower than the market capitalization that the market has determined for Papa Murphy’s, which rests at around $200 million. If this employee correlation method is more accurate than the market, then, then it would be a good time to sell. However, there are several reasons why this valuation could be deflated. There are also a few reasons why it could be inflated, but these are less convincing.


● Papa Murphy’s is small. ○ Because it’s small, it might take more employees to produce the same

level of output. ○ This would act in accordance with economies of scale.


● Papa Murphy’s isn’t open for as long.○ Papa Murphy’s is only open for 10 hours a day, much less than other

competing firms, and so it doesn’t need as much staff to produce results.

● Papa Murphy’s doesn’t have drivers.○ Papa Murphy’s doesn’t have to hire drivers, and so its relatively

reduced level of employment would result in a lower market capitalization using this method.

● Papa Murphy’s doesn’t bake or freeze. ○ Both baking and freezing pizzas take time. ○ Employees at Papa Murphy’s don’t have to do either of those things

and so they save some time relative to competing firms. ○ This means that fewer employees can be hired to achieve the same

value, resulting in a severely deflated valuation using this method.

LinkedIn Follower Correlation Method

The LinkedIn follower correlation method is about exactly as it sounds. By tracking the market capitalizations for each firm and then finding a correlation between that and the number of LinkedIn followers each company has, a valuation for Papa Murphy’s can be established.

Process

The first step in this process is to find the number of LinkedIn followers that Papa Murphy’s has. This is 8,651.

The next step in this process is to establish correlations between the market capitalization and the LinkedIn followers for each of the comparable firms included in this analysis.

Pizza Hut

Market capitalization = $33,620,000,000Number of LinkedIn followers* = 166,172Market capitalization per LinkedIn follower ratio = $202,320

*The number of LinkedIn followers includes followers of Yum! Brands as well as followers of its major subsidiaries (Pizza Hut, Taco Bell, and KFC). This is necessary because Yum! is a conglomerate that requires that at least most of its followers be accounted for to make an accurate ratio.

Papa John’s

Market capitalization = $2,100,000,000Number of LinkedIn followers = 21,430Market capitalization per LinkedIn follower ratio = $97,993

Domino’s

Market capitalization = $6,860,000,000Number of LinkedIn followers = 40,213Market capitalization per LinkedIn follower ratio = $170,591

These ratios are then averaged to arrive at an average of $156,968 added to the market capitalization per LinkedIn follower. When this is applied to the 8,651 followers that Papa Murphy’s has, a final valuation of $1,357,930,168 is reached using the LinkedIn follower correlation method.


This valuation is roughly seven times the current valuation of Papa Murphy’s. If the market is anywhere near correct, then this method is wrong. However, if the market is, in fact wrong, then Papa Murphy’s is probably the best investment that anyone could ever make.


● Papa Murphy’s is small.○ Small companies with any notoriety at all may have a baseline of

followers. ○ It is possible that it is hard to get additional followers beyond a certain

point that Papa Murphy’s hasn’t yet reached.○ This would result in an inflation.

● Take ‘N’ Bake pizzas have a higher level of customer loyalty and following. ○ If this is the case, then Papa Murphy’s could be at too high of a

valuation.


● Pizza Hut is part of a conglomerate.○ Pizza Hut is just part of a conglomerate, and it is possible that it Yum!

Brands, its parent company, has followers repeating across its various brands.

○ If someone follows Yum! across multiple brands, then they are deflating the value of a follower.

● Take ‘N’ Bake pizzas have a lower level of customer loyalty and following. ○ If people don’t care about this model of pizzas, they aren’t likely to

follow Papa Murphy’s.○ This would result in a sub-actual valuation for Papa Murphy’s.

● Papa Murphy’s is small. ○ This could work either way. ○ If brands require a certain level of critical mass before they get any

followers at all, then it is possible that Papa Murphy’s is far below its actual valuation using this method.

Facebook Follower Correlation Method

The Facebook follower correlation method is about exactly as it sounds. It is very similar to the LinkedIn follower correlation method. By tracking the market capitalizations for each firm and then finding a correlation between that and the number of Facebook followers each company has, a valuation for Papa Murphy’s can be established.

This valuation method differs from the LinkedIn follower correlation method largely because pizza is a consumer good. As such, the larger access to consumer audiences (as opposed to business audiences) found on Facebook means a much larger following for each brand on Facebook than on LinkedIn and thus a lower ratio

for each. This also only looks at the Facebook followers on the company’s main page, not on the many ancillary pages.

Process

The first step in this process is to find the number of Facebook followers that Papa Murphy’s has. This is 837,910.

The next step in this process is to establish correlations between the market capitalization and the Facebook followers for each of the comparable firms included in this analysis.

Pizza Hut

Market capitalization = $33,620,000,000Number of Facebook followers* = 78,611,491Market capitalization per Facebook follower ratio = $428

*The number of Facebook followers includes followers of Yum! Brands as well as followers of its major subsidiaries (Pizza Hut, Taco Bell, and KFC). This is necessary because Yum! is a conglomerate that requires that at least most of its followers be accounted for to make an accurate ratio.

Papa John’s

Market capitalization = $2,100,000,000Number of Facebook followers = 4,074,599Market capitalization per Facebook follower ratio = $515

Domino’s

Market capitalization = $6,860,000,000Number of Facebook followers = 10,579,609Market capitalization per Facebook follower ratio = $648

These ratios are then averaged to arrive at an average of $530 added to the market capitalization per Facebook follower. When this is applied to the 837,910 followers that Papa Murphy’s has, a final valuation of $444,092,300 is reached using the Facebook follower correlation method.


This valuation is roughly two times the current valuation of Papa Murphy’s. If the market is correct, then this method is wrong. However, if the market is, in fact wrong, then Papa Murphy’s is a very good investment since it should be at roughly twice its current price.






valuation.









Twitter Follower Correlation Method

The Twitter follower correlation method is about exactly as it sounds. It is very similar to the LinkedIn and Facebook follower correlation methods. By tracking the market capitalizations for each firm and then finding a correlation between that and the number of Twitter followers each company has, a valuation for Papa Murphy’s can be established.

This valuation method differs from the LinkedIn follower correlation method largely because pizza is a consumer good. As such, the larger access to consumer audiences (as opposed to business audiences) found on Twitter, as with Facebook, means a much larger following for each brand on Twitter than on LinkedIn and thus a lower ratio for each. This also only looks at the Twitter followers on the company’s main page, not on the many ancillary pages.

Process

The first step in this process is to find the number of Twitter followers that Papa Murphy’s has. This is 5,947.

The next step in this process is to establish correlations between the market capitalization and the Twitter followers for each of the comparable firms included in this analysis.

Pizza Hut

Market capitalization = $33,620,000,000Number of Twitter followers* = 4,124,500Market capitalization per Twitter follower ratio = $8151

*The number of Twitter followers includes followers of Yum! Brands as well as followers of its major subsidiaries (Pizza Hut, Taco Bell, and KFC). This is necessary because Yum! is a conglomerate that requires that at least most of its followers be accounted for to make an accurate ratio.

Papa John’s

Market capitalization = $2,100,000,000Number of Twitter followers = 385,000Market capitalization per Twitter follower ratio = $5455

Domino’s

Market capitalization = $6,860,000,000Number of Twitter followers = 1,020,000Market capitalization per LinkedIn Twitter ratio = $6725

These ratios are then averaged to arrive at an average of $6,777 added to the market capitalization per Twitter follower. When this is applied to the 5,947 followers that Papa Murphy’s has, a final valuation of $40,302,819 is reached using the Twitter follower correlation method.


This valuation is roughly one fifth of the valuation determined by the market. It is so extraordinarily low relative to market estimates, that if any credence is placed in the results achieved by this method, then Papa Murphy’s stock should be sold immediately.






valuation.









● Papa Murphy’s just is new to Twitter.○ If they’re newer to Twitter than the other guys, then they don’t have

the same level of market capitalization, but this should not be the case.

Instagram Follower Correlation Method

The Instagram follower correlation method is about exactly as it sounds. It is very similar to the LinkedIn, Twitter, and Facebook follower correlation methods. By tracking the market capitalizations for each firm and then finding a correlation between that and the number of Instagram followers each company has, a valuation for Papa Murphy’s can be established.

This valuation method differs from the LinkedIn follower correlation method largely because pizza is a consumer good. As such, the larger access to consumer audiences (as opposed to business audiences) found on Instagram, as with Twitter and Facebook, means a much larger following for each brand on Instagram than on LinkedIn and thus a lower ratio for each. This also only looks at the Instagram followers on the company’s main page, not on the many ancillary pages.

Process

The first step in this process is to find the number of Instagram followers that Papa Murphy’s has. This is 3,907.

The next step in this process is to establish correlations between the market capitalization and the Instagram followers for each of the comparable firms included in this analysis.

Pizza Hut

Market capitalization = $33,620,000,000Number of Instagram followers* = 2,252,000Market capitalization per Instagram follower ratio = $14,928

*The number of Instagram followers includes followers of Yum! Brands as well as followers of its major subsidiaries (Pizza Hut, Taco Bell, and KFC). This is necessary because Yum! is a conglomerate that requires that at least most of its followers be accounted for to make an accurate ratio.

Papa John’s

Market capitalization = $2,100,000,000Number of Instagram followers = 77,600Market capitalization per Instagram follower ratio = $27,061

Domino’s

Market capitalization = $6,860,000,000

Number of Instagram followers = 620,000Market capitalization per Instagram follower ratio = $11,065

These ratios are then averaged to arrive at an average of $17,685 added to the market capitalization per Instagram follower. When this is applied to the 3,907 followers that Papa Murphy’s has, a final valuation of $69,095,295 is reached using the Instagram follower correlation method.


This valuation is roughly one third of the valuation determined by the market. It is low enough relative to market estimates, that if any credence is placed in the results achieved by this method, then Papa Murphy’s stock should be sold immediately.






valuation.









● Papa Murphy’s just is new to Instagram.○ If they’re newer to Instagram than the other guys, then they don’t

have the same level of market capitalization, but this should not be the case.

Pinterest Follower Correlation Method

The Pinterest follower correlation method is about exactly as it sounds. It is very similar to the LinkedIn, Pinterest, Twitter, and Facebook follower correlation methods. By tracking the market capitalizations for each firm and then finding a correlation between that and the number of Pinterest followers each company has, a valuation for Papa Murphy’s can be established.

This valuation method differs from the LinkedIn follower correlation method largely because pizza is a consumer good. As such, the larger access to consumer audiences (as opposed to business audiences) found on Pinterest, as with Twitter, Instagram, and Facebook, means a much larger following for each brand on Pinterest than on LinkedIn and thus a lower ratio for each. This also only looks at the Instagram followers on the company’s main page, not on the many ancillary pages.

Process

The first step in this process is to find the number of Pinterest followers that Papa Murphy’s has. This is 612.

The next step in this process is to establish correlations between the market capitalization and the Pinterest followers for each of the comparable firms included in this analysis.

Pizza Hut

Market capitalization = $33,620,000,000Number of Pinterest followers* = 17,100Market capitalization per Pinterest follower ratio = $1,996,081

*The number of Pinterest followers includes followers of Yum! Brands as well as followers of its major subsidiaries (Pizza Hut, Taco Bell, and KFC). This is necessary because Yum! is a conglomerate that requires that at least most of its followers be accounted for to make an accurate ratio.

Papa John’s

Market capitalization = $2,100,000,000Number of Pinterest followers = 2,700Market capitalization per Pinterest follower ratio = $777,778

Domino’s

Market capitalization = $6,860,000,000Number of Pinterest followers = 1,500Market capitalization per Pinterest follower ratio = $4,573,333

These ratios are then averaged to arrive at an average of $3,231,192 added to the market capitalization per Pinterest follower. When this is applied to the 612 followers that Papa Murphy’s has, a final valuation of $1,977,489,504 is reached using the Pinterest follower correlation method.


This valuation is extraordinarily high. It is about 10 times as high as the current Papa Murphy’s market capitalization. This method is perhaps more inaccurate than the other social media correlation methods because Pinterest is not widely used by these companies; it is affected greatly by even small fluctuations within the follower levels.






valuation.





● Take ‘N’ Bake pizzas have a lower level of customer loyalty and following.

○ If people don’t care about this model of pizzas, they aren’t likely to follow Papa Murphy’s.

○ This would result in a sub-actual valuation for Papa Murphy’s. ● Papa Murphy’s is small.

○ This could work either way. ○ If brands require a certain level of critical mass before they get any


● Papa Murphy’s just is new to Pinterest.○ If they’re newer to Pinterest than the other guys, then they don’t have

the same level of market capitalization, but this should not be the case.

Statistical Analysis

To get more insight on how accurate these valuation methods are and to track where an actual valuation number might exist within the ranges above, some statistical analysis must be conducted.

Valuations for Reference

All six valuations are listed here for reference:

● Asset valuation ratio method○ $1,559,165,860

● Employee number correlation method○ $135,569,202

● LinkedIn follower correlation method○ $1,357,930,168

● Facebook follower correlation method○ $444,092,300

● Twitter follower correlation method○ $40,302,819

● Instagram follower correlation method○ $69,095,295

● Pinterest follower correlation method○ $1,977,489,504

The variation between these seven methods is extraordinary. They range from nearly $2 billion to $40 million. That is a difference of $1,937,186,685. The upper end is nearly fifty times higher than this. The main conclusion that can be drawn from this, is that this experiment in other valuation methods than P/E ratios is not very worthwhile. The differences are too large to pay credence to either the smallest or the largest of these valuations.

Seven-Method Average and Mode

With all six methods the average valuation is $797,806,450. Already this seems outlandish, given that not one of these valuations is remotely close to this mean. The mode of these methods is $444,092,300. This is $300 million lower than the average. Even with this rudimentary statistical analysis, it is clear that there are significant problems these methods.

However, to be thorough in determining the error of these valuations, further analysis must be conducted. Two of the main tools that will be looked at here are the variance and the standard deviation of this data set. The variance and standard deviation of the seven valuation methods is as follows:

Variance Calculation

( ( 1,559,165,860.00 - 797,806,450 ) ^ 2 + ( 136,569,202.00 - 797,806,450 ) ^ 2 + ( 1,357,930,168.00 - 797,806,450 ) ^ 2 + ( 444,092,300.00 - 797,806,450 ) ^ 2 + ( 40,302,819.00 - 797,806,450 ) ^ 2 + ( 69,095,295.00 - 797,806,450 ) ^ 2 + ( 1,977,489,504.00 - 797,806,450 ) ^ 2 ) / 7 = 6.59 * 10 ^ 17

( ( valuation of firm using the asset valuation ratio method - average valuation ) ^ 2 + ( valuation of firm using the employee number correlation method - average valuation ) ^ 2 + ( valuation of firm using the LinkedIn follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Facebook follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Twitter follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Instagram follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Pinterest follower correlation method - average valuation ) ^ 2) / number of methods = variance

Standard Deviation Calculation

Square root ( ( ( 1,559,165,860.00 - 797,806,450 ) ^ 2 + ( 136,569,202.00 - 797,806,450 ) ^ 2 + ( 1,357,930,168.00 - 797,806,450 ) ^ 2 + ( 444,092,300.00 - 797,806,450 ) ^ 2 + ( 40,302,819.00 - 797,806,450 ) ^ 2 + ( 69,095,295.00 - 797,806,450 ) ^ 2 + ( 1,977,489,504.00 - 797,806,450 ) ^ 2 ) / 7 ) = 6.59 * 10 ^ 17

SQRT ( ( ( valuation of firm using the asset valuation ratio method - average valuation ) ^ 2 + ( valuation of firm using the employee number correlation method - average valuation ) ^ 2 + ( valuation of firm using the LinkedIn follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Facebook follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Twitter follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Instagram follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Pinterest follower correlation method - average valuation ) ^ 2) / number of methods ) = standard deviation

Using all seven methods, both the standard deviation and variance are enormous. The findings are not very tightly aligned. On average, these valuations are very different and, thus, probably not that good.

Consideration of Outliers

The problem with finding outliers in this data set is that the standard deviation is so large that virtually anything falls inside the 1.5 interquartile range from the mean, meaning that nothing can really be considered an outlier despite the extreme values presented in the data.

However, just to verify that this postulation is correct, the interquartile range and upper and lower limits within which data can fall and not be considered an outlier is calculated here.

Inter-Quartile Range Calculation

The interquartile range for the set of the seven numbers involves taking the difference between the sixth and the second data points when ordered from smallest and highest. This ordering goes as follows:

● 40,302,819.00● 69,095,295.00● 136,569,202.00● 444,092,300.00● 1,357,930,168.00● 1,559,165,860.00● 1,977,489,504.00

In this case, those numbers are 69,095,295.00 for the fifth data point and 1,559,165,860.00 for the second. The difference between them, 1,490,070,565.00, is the interquartile range.

A statistical outlier is datum that lies outside of 1.5 standard deviations from the median. The median for this data set is the fourth valuation, 444,092,300.00. On the lower end of the non-outlier range, then, lies the 444,092,300.00 - 1,490,070,565.00, or -1,045,978,265.00. The interquartile range for this data set, then is so absolutely enormous that the relevant range extend to over $1 billion dollars under zero. This is obviously impractical; the business cannot be worth negative money in any remotely feasible view of Papa Murphy’s. As such, the limit on the lower side shall be

$0. On the upper end of the feasible range is 444,092,300.00 + 1,490,070,565.00, or 1,934,162,865.00.

This upper end is more interesting. Because the upper bound lies barely underneath the highest value, that highest value, 1,977,489,504.00 is an outlier, even though the measly 43,326,693 difference between the two values is only 2 percent of the actual value. So, improbable as it initially seemed, according to these interquartile range calculations, the highest valuation for Papa Murphy’s should not be considered within the data set. That will lead to the calculation of a new mean that does not consider this seventh method.

6-Method Average

When the upper-limit outlier is left out of the calculations, the average valuation found by using these valuation methods changes to $601,192,607.33 from the enormous $797,806,449.71 that it was before. This gap of nearly $200 million is attributable to the fact that the upper value was, indeed, an enormous outlier.

6-Method Variance

To properly conduct the confidence intervals as shown below, the variance must be calculated from just the six valuation methods, since the seventh is no longer included in the analysis. The calculations are included here:

( ( 1,559,165,860.00 - 797,806,450 ) ^ 2 + ( 136,569,202.00 - 797,806,450 ) ^ 2 + ( 1,357,930,168.00 - 797,806,450 ) ^ 2 + ( 444,092,300.00 - 797,806,450 ) ^ 2 + ( 40,302,819.00 - 797,806,450 ) ^ 2 + ( 69,095,295.00 - 797,806,450 ) ^ 2 ) / 7 = 4.66 * 10 ^ 17

( ( valuation of firm using the asset valuation ratio method - average valuation ) ^ 2 + ( valuation of firm using the employee number correlation method - average valuation ) ^ 2 + ( valuation of firm using the LinkedIn follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Facebook follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Twitter follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Instagram follower correlation method - average valuation ) ^ 2 + ) / number of methods = variance

Using all seven methods, both the standard deviation and variance are enormous. With just the six, though, the variance deviation reduces from 6.58 * 10 ^ 17 to 4.66 * 10 ^ 17. This gap is still very large, but is more manageable.

6-Method Standard Deviation

To properly conduct the confidence intervals as shown below, the standard deviation must be calculated from just the six valuation methods, since the seventh is no longer included in the analysis. The calculations are included here:

Square root ( ( ( 1,559,165,860.00 - 797,806,450 ) ^ 2 + ( 136,569,202.00 - 797,806,450 ) ^ 2 + ( 1,357,930,168.00 - 797,806,450 ) ^ 2 + ( 444,092,300.00 - 797,806,450 ) ^ 2 + ( 40,302,819.00 - 797,806,450 ) ^ 2 + ( 69,095,295.00 - 797,806,450 ) ^ 2 ) / 7 ) = 682443376.2

SQRT ( ( ( valuation of firm using the asset valuation ratio method - average valuation ) ^ 2 + ( valuation of firm using the employee number correlation method - average valuation ) ^ 2 + ( valuation of firm using the LinkedIn follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Facebook follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Twitter follower correlation method - average valuation ) ^ 2 + ( valuation of the firm using the Instagram follower correlation method - average valuation ) ^ 2 + ) / number of methods ) = standard deviation

Using all seven methods, both the standard deviation and variance are enormous. With just the six, though, the deviation reduces from 811,607,349.10 to 682,443,376.20. This gap is still very large, but is more manageable.

Confidence Intervals

This standard deviation within the data can then be used to find a confidence interval of the actual valuation of the company. Papa Murphy’s has a 0 percent chance of actually having an exact valuation of $601,192,607.33 as calculated above. However, with a confidence interval, a range can be created that will have a given probability and a range for the actual value of Papa Murphy’s. Calculated here are a 50 percent, 75 percent, 90 percent, 95 percent, 97.5 percent, 99 percent, 99.9 percent, 99.99 percent, and 99.999 percent confidence intervals. These confidence intervals are based on the mean and data set that does not include the outlier method.

Because calculating the confidence interval requires the use of a Z score, or in this case, a T score because of the limited sample size, and Z scores are just approximations when looked up by hand, all calculations for confidence intervals shown here were computed using a dedicated confidence interval calculator with more precise Z score measurements. Inputs from the calculator are included.

Confidence Interval Calculations

A 50 percent confidence interval for the valuation mean of $601,192,607.33 is $398,733,044.23 and $803,652,170.42. This essentially means that there is a 50 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 50 percent confidence interval:

A 75 percent confidence interval for the valuation mean of $601,192,607.33 is $238,739,955.45 and $963,645,259.21. This essentially means that there is a 75 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 75 percent confidence interval:

A 90 percent confidence interval for the valuation mean of $601,192,607.33 is $190,001,051.75 and $1,012,383,262.91. This essentially means that there is a 90 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 90 percent confidence interval:

A 95 percent confidence interval for the valuation mean of $601,192,607.33 is $-114,987,793.87 and $1,317,373,008.53. This essentially means that there is a 95 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. The fact that one of the limits has gone below zero marks the large variance in the data. However, it is worth continuing out of interest, and to see the upper bound increase. Here are the calculator inputs for the 95 percent confidence interval:

A 97.5 percent confidence interval for the valuation mean of $601,192,607.33 is $-280,145,525.70 and $1,482,530,740.36. This

essentially means that there is a 97.5 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 97.5 percent confidence interval:

A 99 percent confidence interval for the valuation mean of $601,192,607.33 is $-522,187,998.42 and $1,724,573,213.08. This level of confidence is fairly drastic, even in an academic setting, but still informative to explore. This essentially means that there is a 99 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 99 percent confidence interval:

A 99.9 percent confidence interval for the valuation mean of $601,192,607.33 is $-1,312,506,050.49 and $2,514,891,265.46. This essentially means that there is a 99.9 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 99.9 percent confidence interval:

A 99.99 percent confidence interval for the valuation mean of $601,192,607.33 is $-2,512,998,303.62 and $3,715,373,518.28. This essentially means that there is a 99.99 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. Here are the calculator inputs for the 99.99 percent confidence interval:

A 99.999 percent confidence interval for the valuation mean of $601,192,607.33 is $4,284,987,796.27 and $5,587,373,010.93. This essentially means that there is a 99.999 percent chance that the true valuation of Papa Murphy's based on the methods used here is between these two values. This level of certainty within a confidence interval is somewhat useless, but if it is absolutely necessary to get the interval completely correct, then this valuation confidence interval range would be effective. Here are the calculator inputs for the 99.999 percent confidence interval:

Final Average Valuation

As calculated earlier, the mean of the five reasonable methods create a final average valuation of Papa Murphy's of $601,192,607.33.

Conclusions

Because of the significant variation between the values, this data set is not reliable. The valuation methods used, while insightful, do not reflect accurately on the actual value of Papa Murphy’s as a company, leaving the P/E projections calculated earlier as the best tool for determining the market capitalization and share price of Papa Murphy’s.

Appendix

This appendix is included for reference primarily for readers without access to Excel or without the desire to switch between Excel and their word processor.

Earnings Model

Here are some of the key elements of the earnings model as used above in this investment analysis.

Income Statement Items

Other Key Data in the Same Time Period

Balance Sheet Items for Same Period

Sales Growth

Pro Forma Income Statement

Pro Forma Balance Sheet

Key Figures

Present Value of Earnings

Disclaimers and Clarification

Chart Reference Data

The data used to create each of the charts used in this analysis is included here along with the chart for additional reference.

Revenue Growth

Revenue Growth as a Percentage

Capital Expenditures

Capital Expenditures as a % of Sales

Capital Expenditures in Franchise Number Context

Number of Franchises

Franchises Added

% Net Margin

Market Cap to EBITDA

% Profitability

$ Sales to $ Assets

Assets/Equity

Return on Equity

Net Income on Sales

Valuation

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