Rave Restaurant Group, Shake Shack and a PIE5 IPO

January 30, 2015 at 10:43 am Leave a comment

It has been two weeks since we added RAVE/PZZI to our focus buy list and what a two weeks it has been. Since the day we added RAVE, it has gone from a closing price of $8.18 to yesterday’s new high of $12.45 and today’s close of $11.97. While that is a breath taking move for such a short period of time, we believe there remains the potential for more upside.

We believe one of the key drivers of RAVE’s recent move higher has been investor recognition that RAVE may spin off PIE5 in an IPO, as it appears increasingly likely that RAVE will follow the new Fast Casual restaurant IPO playbook by selling a small number of shares that represents a minority stake in PIE5. Given investor’s current appetite for fast casual restaurant stocks, RAVE could likely raise enough capital to fund its corporate store openings for the next 3-4 years while retaining majority ownership of PIE5, with a likely result that RAVE’s market cap would move significantly higher to reflect its percentage ownership stake in the more richly valued PIE5. PIE5’s valuation in a limited share offering (and in post offering trading) would likely be similar to what we saw with Zoes (Nasdaq: ZOES)  and what we are likely to see with Shake Shack, as investor demand for shares in one of the fastest growing players in the fast casual pizza space meets a small supply of shares and the scarcity factor pushes the price to very high levels. We note that when Noodles & Co (Nasdaq: NDLS) came to market, its underwriters raised the price range several times before pricing at $18 and the price then surged more than 100% on its first day of trading. Similarly, Potbelly (Nasdaq: PBPB) soared over 120% in its first day of trading. While some of these fast casual chains have given back some of those early gains, they have almost all continued to trade a valuations that are much higher than other restaurant stocks and it would be an understatement to say that investors are beating the bushes to find fast casual restaurant concepts that could grow to be the next Chipotle or Panera and in the current market environment they do not mind paying top dollar to get a piece of that growth.

As for the likelihood that this will occur in the near future, we believe RAVE’s change to a holding company structure, followed by the name change to RAVE Restaurant Group indicates that the company is already well down that path, having already taken two key early steps necessary to accomplish this. Pie5’s strong pipeline of both corporate owned and franchise store openings, very strong and growing store level economics and a remarkably robust market for fast casual restaurant concepts further leads us to believe that we may see a PIE 5 spin off IPO in the near future.

We believe that the scarcity factor that seems to be a driving force in pushing these fast casual restaurant offerings to stratospheric valuations will again be evidenced tomorrow when Shake Shack (a company whose store count and expected store growth over the next 2-3 years is arguably just a year or so ahead of PIE5) comes to market. As investors jockey to get a piece of the next high growth restaurant concept, the two key factors in play should again be investor’s enthusiasm for high quality fast casual concepts that have strong growth prospects and the fact that there aren’t enough high quality fast casual restaurant shares to be had.  We expect to see all of that and more with the Shake Shack offering tomorrow and it will be interesting to see if investors start to push RAVE shares even higher as they begin to consider the potential valuation range for PIE5 in an IPO and realize the value that would flow to holders of RAVE stock as a result.


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