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Is Noodles & Co (NDLS) the Next Success Story?

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Noodles & Co (NASDAQ:NDLS)The hottest initial public offering in 2013 wasn’t a Silicon Valley tech firm or a biotechnology company from India. It was a low-end pasta joint based in Denver that went public two weeks ago. The initial public offering, the first from any restaurant this year, was a blockbuster despite a volatile market that has led several companies to cut the size of their IPOs or scrap them altogether. Shares of Noodles & Co (NASDAQ:NDLS) were up nearly 96 percent in late morning trading, and are now resting comfortably way above the $40 mark. That’s a total gain of more than 120% in two weeks of trading, nothing short of phenomenal. It seems that investors are absolutely starved for a good plate of noodles.

Who are you, Noodles & Company?

Noodles & Co (NASDAQ:NDLS) is a fast-growing casual restaurant offering both lunch and dinner meals. The restaurant chain offers high quality noodle and pasta dishes with flavors coming from across the world. Most of the dishes offered could be had for less than $8. Those are highly affordable, quality meals. At the moment, the company operates 343 restaurants across 26 states, of which 52 are franchised locations. Noodles & Co (NASDAQ:NDLS) sold 5.36 million shares for $18.00 a piece, thereby raising $96.5 million in gross proceeds. All shares were offered by the company with none being offered by selling shareholders. But the real reason behind this sudden urge for noodles isn’t in the dish. It’s in the growth prospects. Many investors envision Noodles & Co (NASDAQ:NDLS) as the next Chipotle Mexican Grill, Inc. (NYSE:CMG) or the next Dunkin Brands Group Inc (NASDAQ:DNKN). Below are two similar aspects to ponder.

Similarity #1: The “Godfather effect”

Neither of these three companies stands by itself. Each and every one had a sponsoring guiding parent to lead it through the intricacies of the fast food market. In Dunkin Brands Group Inc (NASDAQ:DNKN)’s case, for example, the “Godfathers” were private equity firms Carlyle, Bain and Lee Partners, which bought the company for $2.425 billion from Pernod Ricard S.A. in December 2005. Following the buyout, the firms focused increasingly on beverages like coffee, which drive customer frequency.

Sales grew from $460 million back in 2010 to $537 million in 2012. Net income jumped from $26.8 million in 2010 to $108 million in 2012. That’s a whopping 315% growth in the bottom-line in only three years. All three firms tripled their profit on Dunkin Brands Group Inc (NASDAQ:DNKN)‘; it was really a huge success. Chipotle Mexican Grill, Inc. (NYSE:CMG) isn’t alone either. Originally a spinoff from its parent company, McDonald’s Corporation (NYSE:MCD), Chipotle’s management is comprised of highly seasoned veterans in the fast food industry that served as officers at McDonald’s Corporation (NYSE:MCD). And they certainly did a great job. Sales have doubled the last five years and earnings have risen 270%. The number of restaurants is up 30% in the last three years.

And Noodles & Co (NASDAQ:NDLS) is well positioned in that aspect. Private equity firm Catterton Partners now holds about 36.7% of Noodles after the IPO. It’s only a matter of time before the firm shares its knowledge and experience with Noodles, which will add value to the company. In addition, Noodles & Co (NASDAQ:NDLS) is headed by Kevin Reddy, former COO of Chipotle Mexican Grill, Inc. (NYSE:CMG). Between 2008 and 2012, years in which top-line growth was hard to come by for consumer-facing companies, Noodles saw revenue practically double, from $170 million to $300 million, while operating income rose eight-fold, from $2 million to $16 million.

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