Noodles & Co (NDLS), Chipotle Mexican Grill, Inc. (CMG), Buffalo Wild Wings (BWLD): Do You Have a Problem with Noodles?

Noodles & Co (NASDAQ:NDLS) is a newcomer to the fast-casual restaurant sector. Even before the IPO I had hoped this company–on the top-ten growth list for several years–would go public so that I could get a piece of the action. But since the company went public my outlook has been cautious, and a 16% decline from recent highs may confirm this company’s ongoing stock problem: valuation. Why is this company still overvalued?

Noodles & Co (NASDAQ:NDLS)Background

Noodles & Co (NASDAQ:NDLS) currently comes at a premium price, with a P/E ratio of 200, and Forward P/E of 73. The current P/E ratio is slightly skewed since it reflects one-time costs associated with the IPO, but even still the Forward P/E is much higher than some rapid-growth competitors.

Company Market Cap P/E Ratio Forward P/E PEG Ratio
Noodles & Company $1.15 billion 201 73 4.68
Chipotle Mexican Grill, Inc. (NYSE:CMG) $12.54 billion 43 31 1.93
Buffalo Wild Wings (NASDAQ:BWLD) $1.97 billion 33 24 1.62

Chipotle Mexican Grill, Inc. (NYSE:CMG) sports a P/E ratio nearly twice the industry average of 22, but the market is willing to support this valuation. In the most recent quarter revenue was up 18% year-over-year, net income was up 7.5%, and it opened 44 new locations. This growth is among the best in the business, but for Chipotle Mexican Grill, Inc. (NYSE:CMG) this is business as usual. The company has no plans to slow down, which makes its valuation understandable.

Buffalo Wild Wings (NASDAQ:BWLD) also has a relatively high P/E ratio, but like Chipotle Mexican Grill, Inc. (NYSE:CMG) it seems warranted. In its most recent quarter Buffalo Wild Wings (NASDAQ:BWLD) increased revenue 28%, net income was up 41%, and the company opened 21 new locations. These openings are just the tip of the iceberg, as management expects to open up to 62 more locations before years end, and 500 over the next couple of years. Judging past performance, I see no reason not to expect that this will indeed happen.

Both Chipotle and Buffalo Wild Wings have high forward P/E’s, but both are also growth titans. Yet, Noodles commands a forward P/E twice that of Chipotle and triple that of Buffalo Wild Wings (NASDAQ:BWLD). Is it worth that price?

The Good

Without a doubt, Noodles & Co (NASDAQ:NDLS) must continue to grow in order to justify its current valuation. As mentioned, the company has been a top-ten grower in the restaurant industry, and this year is no exception. Management reported that it opened 21 new locations in the 2nd quarter–this looks to position it to achieve 50 openings this year, or 15% unit growth. Get used to this kind of growth–this 348-unit chain is expecting to open 2,500 location in 15 years.