The hot industry gets the big-time valuations, and usually that industry lies in or around technology. It makes sense, given that many of the companies are set for lightning-fast growth and offer products and services that make investors swoon. But lately, there’s an unsuspecting industry rivaling tech’s historic P/E dominance: quick-service restaurants. With multiple QSRs trading at 30 times earnings or more, some investors are scratching their heads. Why are we paying so much for fast food?
Fast and furious
Upon its IPO several business days ago, Noodles & Co (NASDAQ:NDLS) stock rocketed up as if it were NASA reincarnated. The company, around since 1995, is 343 restaurants strong, with more on the way. Unsurprisingly, Noodles & Company sells mainly noodle-based dishes, but from different corners of the earth — customers can opt for Chinese, Italian, Thai, Indonesian, and more. (Of course, all dishes are centered toward more Americanized versions of the ethnic foods.)
An interesting concept? Sure. For 208 times trailing earnings … wait, what? It’s true. Noodles & Co (NASDAQ:NDLS) trades at 208 times 2012’s earnings. On an EV/EBITDA basis, the company trades at roughly 30 times.
Now, obviously this is the market predicting Chipotle Mexican Grill, Inc. (NYSE:CMG), version 2.0. But as Barron’s recently pointed out, Noodles isn’t quite Chipotle Mexican Grill, Inc. (NYSE:CMG). Last year’s same-store sales were up 5.4% and in the last quarter up 2.2%. In the year before Chipotle Mexican Grill, Inc. (NYSE:CMG)’s IPO, same-store sales jumped 10.2%, and the company was earning much more per restaurant.
Even if Noodles & Co (NASDAQ:NDLS) is the next Chipotle Mexican Grill, Inc. (NYSE:CMG), there is still considerable risk. Chipotle Mexican Grill, Inc. (NYSE:CMG) is an incredibly expensive company to own. While it’s tough to argue with the more than 800% rise in stock price since its 2006 IPO, Chipotle Mexican Grill, Inc. (NYSE:CMG) was a risky bet that paid off. At Chipotle’s 31 times forward earnings, the market expects it to continue its amazing growth — even while domestic opportunities are slowing and some international prospects (such as the company’s London operations) have not played out as expected.
Price-conscious investors understand that they pass up certain opportunities in the name of a good night’s sleep. Paying $200 for $1 of yesterday’s earnings, for a fast-food noodle restaurant, does not let one sleep well.