Can Noodles & Co. Keep It Up?

Noodles & Co. (NASDAQ: NDLS  ) is putting the "fast" in fast casual.

The quick-service chain that serves up all types of noodles -- from pasta to pad Thai to good ole mac and cheese -- bucked last week's market decline by closing out the week 11% higher. The stock has gone on to more than double since going public at $18 in late June.

Last week's pop was fueled by CEO Kevin Reddy appearing on Jim Cramer's Mad Money, discussing his chain's prospects.

Reddy painted an intriguing portrait of a company that's starting to excel in the fast-casual niche that has turned Chipotle Mexican Grill (NYSE: CMG  ) and Panera Bread (NASDAQ: PNRA  ) into market beaters.

Consumers are trading up from fast food, but they don't want the long waits, forking over tips for table service, and having to flag down someone from the wait staff for the check at the end of a meal. Patrons at Noodles, Chipotle, and Panera order and pay at a counter.

Reddy paints an interesting picture. There were 348 locations at the end of June, but he sees room for as many as 2,500 in this country alone. He's allowed to dream big. He was Chipotle's COO before moving on to Noodles & Co. in 2005. He argues that there isn't a company offering a similar product -- which Cramer quipped is like the "United Nations of food" -- on this scale.

The concept is sound, and comps have risen in 29 of the past 30 quarters. In other words, customers are tiring of the experience. The concerns with Noodles at this point stem largely around valuation. It wasn't a cheap IPO at $18, and it's certainly not any cheaper now that's it's trading 154% higher.

Noodles is trading at 83 times next year's earnings. Despite the clear expansion upside, revenue grew at a modest 18% clip in its latest quarter. Chipotle and Panera only grew their revenue at 18% and 11% clips, respectively, during the same period, but they were both growing a lot faster at this stage of their growth cycles. They're also not fetching the same kind of steep multiples that Noodles is presently commanding.

This doesn't mean that the rally's over. Going public this summer will help give the promising fast-casual operator easier access to expansion capital. There's also the welcome brand awareness that comes with trading publicly. Noodles was unfairly compared to Chipotle when it went public earlier this summer. Chipotle was far more successful in terms of revenue growth, comps, and even revenue per eatery when it hit the market. However, don't dismiss Noodles, as it's a unique concept that's resonating with both diners and investors.

The stock's lofty valuation makes it vulnerable to a correction, but the long-term outlook is no wet noodle here.

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Read/Post Comments (5) | Recommend This Article (7)

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  • Report this Comment On September 03, 2013, at 11:15 AM, joe461027 wrote:

    'The concept is sound, and comps have risen in 29 of the past 30 quarters. In other words, customers are tiring of the experience.'

    *aren't?

    try the pad thai

  • Report this Comment On September 03, 2013, at 11:53 PM, dstb wrote:

    Should clearly have higher revenue growth at this stage. Store growth should be 15%+ and comps should be more than 2 or 3%.

  • Report this Comment On September 04, 2013, at 6:25 PM, pacohLLC wrote:

    Thanks for the insight. Am interested in further analysis of this and other fast casual

    concepts looking to grow

    Also wondering about the Chop House spin off from Chipotle

  • Report this Comment On September 05, 2013, at 4:33 PM, TMFBreakerRick wrote:

    Paco, Chipotle is unlikely to spin off ShopHouse anytime soon. I've been to the original location a few days after it opened. It was busy and promising, but it will be several years before it can grow to the point where it actually moves the needle at CMG.

  • Report this Comment On September 06, 2013, at 3:47 PM, tediblnd wrote:

    Noodles and company is going to be opening up a location at the Metreon in San Francisco!

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