Why Is Noodles an Attractive Buy?
Anjum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even Jim Cramer is infuriated at having overlooked this stock. Noodles & Company (NASDAQ: NDLS) issued its IPO last week, and it's stock price has almost doubled in four days. What could the reason be for this? Is this upside just an illusion, or are the investors highly optimistic and confident about the future growth of the company? Let’s look at some of the company's key points to reach a conclusion about its prospects.
Strong menu and management
Two people who were involved in the evolution of Chipotle Mexican Grill (NYSE: CMG) as a fast food powerhouse are now with Noodles. CEO Kevin Reddy and CFO Keith Kinsey have an impressive and successful career graph along with 25+ and 30+ years of experience in the restaurant industry. This gives investors a strong reason to have faith in the company.
The company's menu is attractive and is not only limited to noodles. It offers pastas, sandwiches, salads and soups too. The company has incorporated Mediterranean, Asian and American styles in its menu as well. With increasing concerns about calories, fats and gluten, Noodles & Company has come up with menus where customers can customize their orders to meet their preferences.
Noodles & Company operates 343 stores, out of which 52 are franchisee-based. The company is in a rapid growth phase and wants to expand exponentially with an increasing fan base across the country. The company is looking for sites in 19 cities across the country where the daytime population is strong and residents have a median household income of over $50K. Successful entry in these locations should trigger a revenue upside for the company.
It is also worth noting that 120 stores have been opened in the past five years amidst the economic uncertainty in the country. The company has generated profits through a mix of self-owned and franchise outlets. Going forward, the company plans to increase the number of restaurants by 2,500 units in the next 15–20 years. Given the company's aggressive expansion plan, it is very likely that it will adopt an asset-light model for expansion. If the expansion plan does materialize, investors can expect robust revenue growth through franchisee fees and royalties going forward.
Considering the products the company offers, there are no direct competitors for Noodles & Company. However, comparisons against companies like Chipotle Mexican Grill and Panera Bread (NASDAQ: PNRA) gives us an insight into the expanding market opportunities for Noodles.
At the time when Chipotle issued its IPO, the company had around 489 restaurants to operate while Noodles closed the 2012 fiscal year with 276 restaurants. On the size front, Noodles is almost half the size that Chipotle was. However, the company has strong fundamentals with revenue growing at a compound annual growth rate of 11% from the 2010 to 2012 fiscal years and comparable sales growth of 5.4%. Moreover, the company is going from local to national and it still has the scope to go international.
If we analyze Chipotle, there a few threats to its revenue growth. Chipotle Mexican Grill sales in London have slowed; this is primarily because of the lack of awareness in the country regarding the Mexican food. Most of Chipotle's offerings are at a price point which is considered high. Londoners prefer a more happening environment, and an unpleasant environment is another turnoff for Chipotle. The Company is planning to offer new products which are more in sync with what customers want. This will take time, however, and will also increase the company's expenses.
Panera Bread is trading at 31 times its earnings for the 2013 fiscal year. An estimated growth of 16% for the 2014 fiscal year translates into a PEG, which suggests overvaluation. Panera Bread has recently announced a cut down in its same store sales growth from 5.5% to 5% for the 2013 fiscal year. The company's upcoming management change might also create uncertainty related to the company's direction and its strategy for future growth and expansion.
This robust upside in price indicates that investors are willing to put in their money into fast-casual brands even when the market is volatile. Noodles & Company being the first restaurant company which has gone public this year proves the point. With strong fundamentals, a unique menu, competent management and aggressive expansion plans, the company is likely to outperform its peers in the coming years.
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Anjum Khan has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!