Invest in Noodles & Co. for Long-Term Growth, Not Near-Term Earnings

Noodles & Company (NDLS -7.86%) released its third quarter report on November 6 and it disappointed the market. The stock was hit hard in the next trading session, falling over 11.8% at one point and closing the day down 9.81%. With this said, I do not think investors should own Noodles for the near-term earnings but rather for its long-term potential which compares well against peers Chipotle Mexican Grill (CMG 0.30%) and Panera Bread (PNRA). Let's take a look at the company, the report, and what we should really be watching for in the quarters to come.

Noodles and more
Noodles & Co. is a fast-casual restaurant chain that offers the world's favorite noodle dishes, sandwiches, salads, and soups. The core principle of the company is that quality food can be served fresh, fast, and in an inviting atmosphere, without emptying the wallets of its customers. The company was founded in 1995 and went public in June of 2013.

(Image Source: Noodles & Co.)

The results
Third quarter results were released on November 6 and the statistics did little to entertain the market. Here's an overview of the key metrics:

Earnings per share grew to $0.11 from $0.01 in the same period in 2012, while revenue rose 15.4% to $88.9 million; these were both driven by a 2.4% increase in comparable-store sales. Arguably the strongest metric reported was adjusted net income rising 44.6% to $3.3 million and management was vocal about this statistic in the report. Noodles opened 20 new restaurants during the quarter, of which 15 are company owned and the other five are franchises.

I believe adding both company-owned and franchised locations is a very strategic move for Noodles, because it allows for maximum expansion when there is not capital readily available. Overall, this was a much better quarter than the market made it out to be, but the decline in the stock is allowing those who know this to pick up a position or add to existing positions.

What's really important
The earnings report was not loved by all, but the decline in the stock that ensued was overdone; this is because Noodles & Co. is a growth company, meaning investors should be willing to sacrifice earnings in order to see what truly matters: expansion and rising revenue. Noodles has just 368 locations, while peer Chipotle Mexican Grill(CMG 0.30%) has 1,539 locations.

As I see it, Noodles could easily expand to over 1,000 locations in the next 10 years and then focus on share repurchases, margin expansion, and other strategic moves to grow earnings per share to its maximum. The kicker to Noodles' growth is that many companies are not profitable during times of rapid expansion, while it is already projected to earn $0.39 to $0.41 per share this year.

Industry role models
Noodles & Co. has the potential to join the ranks of Chipotle Mexican Grill and Panera Bread(PNRA) in the quick-serve, food-with-integrity industry. All three restaurants are differentiated enough to grow alongside each other and share the same quality characteristics that consumers have come to demand; these include fresh ingredients sourced locally, quick and friendly service, and actively supporting the local community.

These types of restaurants have taken America by storm and there may be no stopping the transition. Not only are the products served fresh and quick, but the majority of the dishes are much healthier than a dish you may order at Brinker's Chili's or Darden's Olive Garden. This can be seen in the stock market when a quick-serve company like Chipotle sees its stock grow over 100% in the last year, while the sit-down, slow-serve restaurant owner Darden has risen just 1.5%.

Chipotle reported third quarter results a few weeks ago and it was another great one for the company; earnings per share increased 17.2% and revenue rose 18% year-over-year. Comparable-store sales jumped 6.2%, showing that consumers continue to flock to its restaurants.

Panera Bread also reported third quarter results in October. Earnings grew 19.4% and revenue increased 8.2%. Panera saw systemwide comparable-store sales growth of 1.7%, which is not nearly the growth of Chipotle, but still very respectable. Both Chipotle and Panera are great investments on any weakness, so take a look at these two if you are not sold on Noodles & Co.'s growth story.

The Foolish bottom line
The next great national quick-service restaurant chain could be Noodles & Co. It has a great product, vision, and business model along with seasoned professional executives, giving it the ingredients for success. Keep an eye on its expansion because this will be the most important factor for Noodles going forward, but also make sure its comparable-store sales continue in a positive direction.