McDonald’s Corporation (NYSE:MCD) generates revenue from its franchisees in two ways – it owns the properties franchisees use and charges rent to its franchisees, and it gets a royalty from each sale. Noodles & Co does not own any of the real estate its franchisees occupy, so it only generates revenues from royalties. McDonald’s generated $3 billion in the royalty portion of the franchisee revenue stream, and had 27,882 franchisees – giving them around $100,000 in royalty revenue from each franchisee. As mentioned, Noodles & Co (NASDAQ:NDLS) currently generates around $60,000 from its franchisees, severely lagging behind McDonald’s Corporation (NYSE:MCD), but if they can deliver on their growth opportunity they might hit revenue streams of McDonald’s level.
Finally, we need to deal with net margins. Noodles & Co has around 1% net margins, consistent with Chipotle Mexican Grill, Inc. (NYSE:CMG)’s and Panera’s figures. However, McDonald’s Corporation (NYSE:MCD) has much higher net margins, close to 18%! The reason from this stems from the fact that franchisees operate over 80% of McDonald’s restaurants, which generate 83% margins.
Now we need to put all of this information together. If Noodles & Co (NASDAQ:NDLS) grows their restaurants at 16% CAGR over the next 13 years, they will have just over 2,252 restaurants by 2025. Assuming they maintain their 80/20 breakdown between company owned stores and franchise stores, they will have 1,801 company owned stores and 450 franchise stores. We predicted above that Noodles & Co could generate $1.5 million in revenue from each company owned store and $100,000 in revenue from each franchise store. Assuming 1% net margins for company owned stores, and 80% margins for franchise stores, around $25 million of the company owned revenue and $34 million in franchise revenue will flow to the bottom line. Net revenue from 2012 to 2025 will climb from $5.5 million to $60 million for a CAGR of 16.67%. And since everyone likes a good model, see below (and link to model in Google Spreadsheets here).
Now let’s bring this full circle, I think the story I told above represents the best case scenario for Noodles & Co, and it yields them a 16% CAGR. Now, using the current market prices, McDonald’s Corporation (NYSE:MCD) should grow at around 10% the rate of Noodles & Co (NASDAQ:NDLS), Panera around 6.8% and Chipotle at around 3.7%. Put differently, McDonald’s should only have a .5% CAGR, Panera should have a 1% CAGR, and Chipotle Mexican Grill, Inc. (NYSE:CMG) should only have a 1.6% CAGR (see table).
| Company | P/E (ttm, rounded) | Market Assumed Growth Rate relative to Noodles & Co | CAGR relative to Noodles & Co 16% |
|---|---|---|---|
| Noodles & Co | 450 | – | |
| Chipotle | 42 | 10% | 1.6% |
| Panera | 31 | 6.8% | 1% |
| McDonald’s | 17 | 3.7% | .5% |
Let’s contrast this with the actual net income CAGR’s for the above companies from the past, say five years.
| Company | 5 year CAGR |
|---|---|
| Chipotle | 21.98% |
| Panera | 17.22% |
| McDonald’s | 4.62% |
Assuming these companies do not crash and burn, and fast, they will continue their growth numbers at a fine clip, totally debunking the current Noodles & Co valuation.
Competition
As mentioned above, Noodles & Co (NASDAQ:NDLS) competes directly with high end fast food chains like Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera, and more indirectly with fast food chains like McDonald’s Corporation (NYSE:MCD). At this point, Noodles & Co has successfully ridden the wave of popularity, and coolness to propel themselves into the hundreds of millions of dollars in sales. However, we need to ask what happens if that juice runs out? What kind of landing would we see?
