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.
Back when I was in college I worked at the Olive Garden as a bartender. During a conversation with the head cook, he explained that the highest profit on the menu comes from spaghetti and meat sauce, as it cost less than $1 to prepare.
While Noodles serves more than just noodles and sauce, I do wonder why the company does not have higher margins. If it were expanding faster, with growth of 30%-40%, then I’d understand the low margins. However, when a company expands slowly, operates in a high margin business, and still has low margins, I view it as a sign of trouble; as everyone knows, pasta is the cheapest food to make.
Final Thoughts
With everything considered, I still expect that Noodles & Co (NASDAQ:NDLS) will trade significantly higher over the next year. Looking back, Chuy’s has gained 155% since its July 2012 IPO, and Bloomin’ Brands (Outback and Carrabba’s) has doubled since its August 2012 IPO. Therefore, the restaurant IPO space is becoming a hot commodity in the market, much like social media in 2011. Since Noodles still trades at a relatively cheap price to sales, I do think the market will respond favorably to its stock over the next year.
However, I prefer Chuy’s Holdings Inc (NASDAQ:CHUY)’s over Noodles. Chuy’s is growing faster, has better margins, and trades with similar metrics. With that said, I feel more comfortable with an investment in Chipotle over Noodles as well, and the growth of its new Asian inspired restaurant segment.
That said, in the end it doesn’t really matter if Noodles & Co (NASDAQ:NDLS) is worth a billion bucks, or if it should trade higher. The market is going to behave how it wants, and right now, the market likes new restaurant stocks. This means, expect gains from Noodles!
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Inc. (NYSE:CMG). The Motley Fool owns shares of Chipotle Mexican Grill.
The article Is This Restaurant Worth a Billion Bucks? originally appeared on Fool.com.
Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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