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Noodles & Co (NDLS): Is This Restaurant Worth a Billion Bucks?

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Noodles & Co (NASDAQ:NDLS) saw the biggest one day jump of any IPO in the last year, as investors hope for a repeat of Chipotle Mexican Grill, Inc. (NYSE:CMG), Buffalo Wild Wings, or Bloomin’ Brands – but should they?

What Is There To Like?

Noodles & Co (NASDAQ:NDLS) (also called “Noodles”) is small, with just 327 stores, but runs a business that focuses on global noodle dishes. Thus, many have associated the company with an early stage Chipotle.

Then, when you consider the company’s ambitions of growing to 2,500 stores over the next 15-20 years, you can see why its IPO produced gains of more than 100%.

Also, the company is good at keeping old customers satisfied, as they estimate that 40% of their customers visit at least once a month.

Finally, the company has star power–former COO of Chipotle Mexican Grill, Inc. (NYSE:CMG) Kevin Reddy is the CEO of Noodles & Co (NASDAQ:NDLS), further adding to the bullish case.

Is It Worth A Billion?

After Noodles’ 104% gain on Friday, and pricing on the high-end of its expected IPO range, its market cap sits right around $1 billion.

In fiscal 2012, Noodles reported sales of near $300 million; so it’s trading around 3.3 times sales. In comparison with the rest of the restaurant sector, that’s not too bad! Chipotle trades at four times sales, and last year’s hot restaurant IPO Chuy’s Holdings Inc (NASDAQ:CHUY) trades at 3.5 times sales.

The problem for Noodles & Co (NASDAQ:NDLS) is that it had a profit last year of just $5.2 million, which means a profit margin of just 2%. With $300 million in revenue, this is not a start-up restaurant, as $300 million in the restaurant business signals an established business. To me, this is very concerning.

Chipotle Mexican Grill, Inc. (NYSE:CMG) has produced a profit margin of 10.36% over the last 12 months, and Chuy’s Holdings Inc (NASDAQ:CHUY)’s has a 4.25% profit margin. Noodles & Co (NASDAQ:NDLS) grew its EPS by 37.5% last year, which is decelerating from the three years prior.

In the last two quarters alone, Chuy’s has produced more profit than Noodles, yet has generated $100 million less in annual revenue. During its last quarter, Chuy’s Holdings Inc (NASDAQ:CHUY)’s grew its bottom line by 593% and its top-line by 25% year-over-year.

Aside from Noodles’ growth being slower, it is projecting just 10% growth over the next year. In my opinion, this does not validate a $1 billion market capitalization. The company is simply not growing fast enough.

I’m Not Buying It

Aside from trading at 190 times earnings, I simply can not get excited about expansion of just 10%. Chipotle Mexican Grill, Inc. (NYSE:CMG) is a company with over $2.8 billion in sales, and it grew 13.4% during its last quarter over the prior year. Thus, why is it that Noodles & Co (NASDAQ:NDLS) can not expand at a greater rate? The answer to the question is unknown, but bothersome nonetheless.

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