The Market Goes Nuts for Noodles-Here's Why

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This last year has seen a few successful restaurant IPOs, with the notable Noodles & Company (NASDAQ: NDLS) doubling its first day out on June 28. It added more on July 1, eventually settling up 4.68%. After such a big move on its first two days of trading will it just end up a limp noodle, or will it stick to the wall?

How other casual dining IPOs have performed

It seems the market has an insatiable appetite for casual dining IPOs. Two up-and-comers that debuted in 2012 were Del Frisco's Restaurant Group (NASDAQ: DFRG) and Bloomin' Brands (NASDAQ: BLMN). Bloomin' owns Outback Steakhouse, Bonefish Grill, Fleming's Steakhouse, Carrabas Italian Grill, and Roy's. Most of their restaurants are medium to high casual dining price points, especially Fleming's and Roy's, both of which are considered upscale.

Bloomin' Brands has a high trailing P/E of 46.94, but the forward P/E comes down to 18.43. It has a PEG at 1.33. The company just debuted last summer, and the stock has already doubled from a low of $11.57 last August.

Bloomin' trades at 10.44 times book, but analysts like the name with 5 Strong Buys, 5 Buys, and only 1 Hold. Analysts predict a five year EPS growth rate of 16.69%.

Del Frisco's has a market cap $509.43 million. It owns and operates 34 restaurants in 19 states under three brands: Del Frisco's Grille, Sullivan's Steakhouse, and Del Friscos Double Eagle Steak House. Del Frisco's is at the higher price point of the casual dining continuum.

The company has a high P/E at 38.16 with a forward P/E of 19.82. Its price to book stands at 1.98.

The stock has been performing well, hitting a 52 week high of $21.75 from a low of $11.73 last August; again, almost a doubling since its debut. As a small cap name it has few analysts, but they like Del Frisco's a lot, with 2 Strong Buys and 3 Buys. They predict a 15.50% five year EPS growth rate.

Is it really a baby Panera?

It seems what the market has been really craving, more so than a Bloomin' or Del Frisco's or even a Chuy's, something that looks a whole lot like Panera Bread (Nasdaq: PNRA).

If Noodles had settled close to its IPO pricing it would have had a similar market cap to tiny Del Frisco's, but now the market cap stands at $953.31 million. Noodles has ten times the number of restaurants as Del Frisco's at 343 in 26 states (291 company-operated, the rest franchised).

Noodles' trailing P/E is a whopping 192.35. A cursory glance at most of its stats is worrying with total cash of just under $1 million and over $100 million in debt. Most of the IPO proceeds are dedicated to paying down that debt. Margins aren't compelling either; the operating margin is 5.27% and the profit margin is 1.54%. Finally, EV/EBITDA is 27.85. What is the market seeing at these lofty levels?

Jim Cramer likened its growth to a nascent Chipotle Mexican Grill, estimating Noodles' growth at 14% plus, like Chipotle years ago. Others think the CAGR is more like 10%, at best. Analysts have noted its fast casual offerings and ambiance are similar to Panera Bread. The two restaurants do look similar to the casual observer.

Like Panera Bread, the food has global influences and is made fresh "before your very eyes." The restaurants feature crowd-pleasers like the Coca-Cola Freestyle machine, local beers, a "no tipping policy," and a varied menu besides pasta of salads, soups, and sandwiches that rivals Panera.

Similar to its more upscale cousins at Bloomin' Brands, Noodle's dishes are served on real dishes with real silverware brought to your table by a server, thus bridging the fast casual gap like Chipotle and Panera with a casual dining experience like Outback Steakhouse. Offerings are priced competitively with Panera at an average of $8 a dish.

The company has plenty of room to expand as its franchise markets available map shows a wide swath of the Southwest, West, Northwest, and Southeast up for grabs, with only most of the Midwest and Mid-Atlantic unavailable. Franchisee agreements typically involve a commitment of over ten years for three to ten locations to be built. That is a serious commitment for a franchisee, including a minimum net worth of $3 million, and a requirement to live in and understand the intended market.

The company has a loyal following and was named as one of NBC's Top Ten "Best Loved Brands" in 2012. Parents Magazine also gave it kudos as a Top Family Friendly restaurant, and for the crunchy granola types, Health Magazine named it one of America's Healthiest Fast Food restaurants.

Before debuting it was named one of America's fastest growing companies from 2007 to 2010 by Inc Magazine, and CEO Kevin Reddy was named 2009 Entrepreneur of the Year by Restaurant Business magazine.

If it is a baby Panera, what's the upside? Panera has given investors a five-bagger since 2009 and almost a fifty bagger since 2000. Panera Bread has a lofty P/E at 30.49, and analysts expect a five year EPS growth rate of 18.89%. For years pundits moaned and groaned over the high valuations of growth chains like Panera and Chipotle, but investors have long been waiting for another Paner.

While Noodles' management hopes to expand to 2,500 restaurants in 20 years, it took Panera 30 years to bring their number of bakery-cafes to 1,652. In 2013 Noodles expects to open 40 company-operated restaurants and around seven franchise restaurants. Bloomin' Brands was already much further along its growth trajectory when it debuted with 1,400 restaurants already in 20 countries.

The final takeaway

Noodles may be the baby Panera, but consider it speculative and leg into it very carefully. It has already doubled, while it took Del Frisco's and Bloomin' Brands almost a year to do that, and they already have earnings under their belt.

Panera continues to rise and still the pundits ask how high can it go. My advice: take a bigger bite of Panera and just nibble on Noodles.

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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Panera Bread. The Motley Fool owns shares of 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!

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