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Subway IPO Update

Written By Brian Hicks

Posted October 17, 2014

An IPO for a New Era

Do you remember the Chipotle (NYSE: CMG) IPO back in 2006?

After raising its IPO price three times — from to $18 to $20 to $22 per share based on overwhelming shareholder interest — Chipotle’s stock price doubled to $44 just on the first day.

At the time, this was the biggest opening-day gainer in a U.S.-based deal in over five years. Now, it’s trading at nearly $650 a share.

If you stuck with the company from day one, you’d be able to claim gains of nearly 3,000%.

If you didn’t, don’t worry about it. There’s another promising IPO on the horizon that could perform even better than the fast-casual restaurant chain… and it has more in common with Chipotle than you might think.

What’s on the Menu?

Considering that either differing ideologies or simply good business practices are keeping both fast-food restaurant chain Chick-Fil-A and Swedish furniture giant IKEA out of the IPO proving ground, what’s the freshest potential IPO candidate you can think of?

Subway is a tasty possibility. It’s the second-largest restaurant chain in the country, following only McDonald’s (NYSE: MCD), and it’s the largest submarine sandwich chain in the world. President and co-founder Fred DeLuca has been making moves to cash out for over three years but has held onto the frustration of potential shareholders.

With such a bloated timeline, how do we know he’s ever going to pull the trigger?

Well, if you aren’t looking to sell, you don’t cull underperforming stores and issue franchisee contracts without built-in renewals.

Buyer, Beware

The original Subway restaurant was founded in Bridgeport, Connecticut in the summer of 1965 under the name Doctor’s Associates Inc. after DeLuca’s former medical aspirations. By 1974, 16 stores were up and thriving throughout Connecticut.

40 years later and with a current 42,774 locations in 108 countries, territory saturation is a reality that franchisees must face, and a changing of the guards is a viable solution given the precedent set by today’s champions of industry.

Such rapid expansion can be attributed to awarding sales agents a cut of the royalties from each store for which they find franchisees. After over four decades of aggressive expansion, unsustainability has all but caught up. With store opening rates at between 30 and 40 per year in a territory containing up to 500 stores as recently as 2011, the biggest question is: How was this practice maintained for so long?

(Soon to Be) Under New Management

Now that sales agents are being shuffled off in favor of a profits spike, their elimination resulted in increased margins for the company itself. Fewer hands in the pot makes a potential sale or IPO that much more appealing.

With an average of $480,000 in annual revenue per restaurant and a total of 42,774 locations, we’re looking at $20.5 billion in total annual sales. As for Subway’s competition, YUM Brands Inc. (NYSE: YUM) — the umbrella under which Taco Bell, Pizza Hut, and KFC huddle — only did $13 billion in total annual revenue in 2013, down from $13.6 billion in 2012 from 39,000 restaurants.

As a sign of things to come, only 10 years after going public, YUM’s stock went from around $15 per share to just under $70, peaking slightly over $80 excluding dividends. Those are gains of up to 540%.

The same can happen once Subway pulls the trigger — but let’s be honest, the stock will probably go even higher.

We don’t know when the massive sandwich chain is going to change hands, either to a competitor or to the masses, but a transaction is coming, and trust me, you don’t want to miss out on this one.

Now, out of the four Subway locations within walking distance of my office, I don’t know how I’m going to choose which one to go to for lunch.

Zach Spiegel