Noodles vs. Burritos: Should Investors Take a Bite?

In 2009, Chipotle  (NYSE: CMG  ) hovered around a market value of $2.5 billion. Many thought that a company that makes burritos, no matter how fresh or sustainable, lacked a moat and any more sizable growth. Today, Chipotle is worth nearly $12 billion.

A little more than a week ago, Noodles & Co. (NASDAQ: NDLS  ) held its initial public offering at $18 per share and quickly spiraled upward to more than double that price. The noodle maker is now worth more than $1 billion.

Are investors confusing their carbohydrate-laden companies? Or are noodles the next portfolio necessity?

Filling up on Chipotle
Chipotle, like Noodles, started in the Denver area in the 1990s. After proving a successful business model, McDonald's purchased a majority stake in the company in 2001 and helped the company grow from 100 locations to 500 before divesting its shares in 2006.

Before Chipotle went public, its average restaurant sales increased substantially from $1.27 million in 2003 to $1.5 million in 2006, which provided a clear picture that increasing revenue was due not just to more locations, but also to a growing business that customers enjoyed. Its financial position grew stronger each year, with increasing earnings before interest, taxes, depreciation, and amortization from $7.2 million in 2003 to $59 million in 2005.

Chipotle also followed a tenet responsible for many successes in business, summed up in its prospectus like this: "We do just a few things but try to do them really well." When McDonalds had control of Chipotle, it pushed for the chain to offer coffee and cookies. According to the Rocky Mountain News, CEO Steve Ells said: "We wouldn't do it better than anyone else. And I don't want anything to be part of Chipotle that wouldn't be the very best." That attitude mirrors what Five Guys Burgers and Fries founder Jerry Murrell says on why the chain doesn't offer milkshakes: It's focused on burgers, and it can't make a better shake than what competitors offer.

Noodling around
Does Noodle & Co. share any characteristics of a young Chipotle?

The breakneck revenue growth of Chipotle's adolescence seems to outpace what Noodles offers. Whereas same-store sales increased 18% for the roughly two year-period before Chipotle's IPO, Noodles' systemwide sales increased about 14.5%. But Noodles' EBITDA appears strong, growing from $17.7 million in 2010 to $30.1 million in 2012.

As far as focus, Noodles shuns the idea that less is more. In its prospectus, it touts its "global flavors" and variety that allows it "to compete against multiple segments throughout the restaurant industry and provide[s] [it] a larger addressable market for lunch and dinner than competitors who focus on a single cuisine." The company writes that this approach "eliminates the 'veto vote' and encourages people with different tastes to enjoy a meal together."

Noodle or burrito bowl?
Financially, Noodles appears to bring the strength of Chipotle, especially with growth available in huge, relatively untouched markets in California and New York. Philosophically, investors will need to stomach a more diverse meal offering. Noodles may have found the one food that can be executed well for diverse cuisines, or it may become a business case of why only intense focus can lead to market domination.

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