When investors think of initial public offerings (IPOs), they often think of the impressive first-day gainers. Box, Inc. (NYSE: BOX), for example, surged 66% on its first day of trading last week.

 

Yet, it’s unwise to focus all of your attention on buzzworthy IPOs. Some just need time to gain traction and while they are slow to get out of the starting gate, clear opportunities emerge.

 

Take Papa Murphy’s Holdings, Inc. (Nasdaq: FRSH), as an example. The popular Washington-based premium pizza chain debuted in May 2014 to a tepid investor reception.

 

#-ad_banner-#Shares, which had been priced at $11 at the offering, eventually slumped roughly 25% by July. Since then, shares have begun to build a following and now trade nearly 20% above the IPO price.

 

That’s not bad at all, but it pales in comparison to other, hotter IPOs. Since going public in September, Chinese e-commerce giant Alibaba Holding Group (NYSE: BABA) has seen its stock soar more than 50% above the initial offering price.

 

Papa Murphy’s might have gotten off to a better start were it not for a considerable debt burden and a $23 million lawsuit by disgruntled franchisees.

 

The key takeaway: these are only short-term obstacles. Management can overcome them and position Papa Murphy’s stock for 15% annual gains over the next few years.

 

 

 

 

The legal issues surfaced a month before the IPO, when 12 franchisees filed a lawsuit claiming management fraudulently misled them about the sales and profits they could expect. A second group of 16 franchise owners joined the suit a couple months later.

 

Although the outcome of the lawsuit is still uncertain, so far Papa Murphy’s appears to have a substantial edge. In its third-quarter filing, the firm reported that the claims of eight franchise owners had been dismissed or were in the process of being dismissed (but with some possibility of being refiled in a few cases).

 

What’s more, a superior court judge recently dismissed any fraud claims by franchise owners residing outside of Washington. However, the judge did rule that all franchisees could pursue breach of contract and negligent misrepresentation, but must further refine their claims in order to do so.

 

Ultimately, Papa Murphy’s doesn’t expect the lawsuits “to have a material adverse effect on our consolidated financial position, results of operations or cash flows.” In a recent analyst note, equity research firm Robert W. Baird said the suit could be a temporary disruption, but that Papa Murphy’s has a solid growth plan. Baird currently gives the company’s stock an “outperform” rating.

 

Papa Murphy’s has long been in expansion mode. Through mergers and acquisitions and organic growth, the chain added an average of 43 locations a year since it was founded in 1981. Recent growth has been much faster, with 50 new U.S. locations opening in the first three quarters of 2014 alone.

 

New product launches have helped fuel this accelerated growth. The latest new offering, a lower-fat, lower-calorie gourmet pizza, has quickly become Papa Murphy’s bestseller by volume. Also, the company shows appeal across generations, with recent market research showing it is the number one or two pizza chain in its markets among baby boomers, gen-Xers and millennials. Millennials will be the focus of Papa Murphy’s online and social media campaign in coming years.

 

Currently, there are 1,333 Papa Murphy’s franchises and 76 company-owned stores domestically, as well as a couple dozen other locations in Canada and the United Arab Emirates. However, CEO Ken Calwell says market research shows that there’s room for 4,500 U.S. locations. Much of the near-term expansion is expected to come from existing markets of the Pacific Northwest and Midwest states like Michigan, Colorado and Texas.

 

Those regions are far from saturated and should still hold ample opportunities to promote Papa Murphy’s unorthodox, but successful, take-and-bake model, where pizza orders are prepared and wrapped for customers to cook at home. Also, management believes it’s crucial to build out existing markets thoroughly before committing heavily to new ones, since it can take time for consumers to fully accept the take-and-bake concept.

 

Once they do, results can be impressive. Indeed, Papa Murphy’s already has a long history of strong growth in same-store sales and average weekly sales — two key performance metrics for the restaurant industry.

 

These trends persisted in 2014, with same-store sales up a solid 3.2% and domestic average weekly sales of $11,000 per store during the first three quarters of the year. Results should be similar when the firm reports its fourth-quarter results next month.

 

Companywide, analysts project 2014 revenues of $95.5 million — an 84% gain since 2011, when sales totaled $52 million.

 

Heavy investments in the various growth initiatives led this pizza chain to be unprofitable in recent years, but analysts are expecting Papa Murphy’s to report a 2014 profit of roughly $0.45 a share.

 

Rising sales should lead to rising profits in the coming years as well. Sales have already grown more than 20% annually since 2011. Assuming a mid-teens grow rate in 2015, 2016 and 2017, look for sales to reach nearly $150 million by 2017.

 

To firm up its balance sheet, Papa Murphy’s used a large chunk of IPO proceeds to reduce long-term debt, which stood at $170 million when the company went public. At the end of the third quarter of 2014, that figure was down to $113 million.

 

 

Risks To Consider: Despite management’s assessment, costs related to the franchisee lawsuit could end up being large enough to substantially hinder Papa Murphy’s financial performance.

 

Action To Take –> This is an ideal business model for growth-oriented investors. Based on the growth that I expect in coming years, I think this stock could rise 54% — or roughly 15% a year — to about $20 in 2017, assuming the current price-to-sales ratio of 2.3 is applied to that projected sales base.

 

 

My colleague Andy Obermueller devotes his time to researching the next Game-Changing Stocks. As I did above, he analyzes current trends to identify companies with the potential for triple-digit returns. This has led to gains of 89%, 92% and even 310% in a year. StreetAuthority compiled a list of the most lucrative upcoming trends called “The Hottest Investment Opportunities For 2015.” For more information on the game-changing opportunities that could crush the market, click here.