Noodles Is Worth a Second Look

Since Noodles & Company (NDLS 8.08%) went public in late June, shares of the restaurant stock have had a bumpy road. The stock soared more than 100%  on its first day of trading and went on to appreciate another 40% or so in the coming months. However, shares of Noodles have recently crept all the way back to levels not seen since the stock's first day of trading.

Accordingly, shares of Noodles are worth a second look as the company continues to remain a viable yet smaller growth alternative to Chipotle Mexican Grill (CMG 6.33%) and Panera Bread (PNRA).

Industry-leading growth
Noodles & Company is a leader in the fast-casual restaurant segment in terms of revenue and earnings-per-share growth. The following is a breakdown of the company's projected growth for 2014 compared to competitors Chipotle and Panera: 

Noodles' solid 2014 revenue growth projection of 16.4% falls just short of Chipotle's 16.8%. However, the company is still expected to increase sales at exactly twice the rate of Panera over the next year. In terms of earnings-per-share growth, Noodles is expected to be the clear leader, with growth expected to surpass 37% in 2014.

The company's most recent earnings release illustrates just how effective management at Noodles has been at sustaining growth. In the third quarter, Noodles grew total revenue to $88.8 million, up 15.4% on a year-over-year basis. The company also managed to grow net income to $3.3 million from $2.3 million in 2012, which represents a staggering 44.6% increase. 

Unfortunately, the top-tier growth of Noodles comes at a very high price. The company's price/earnings multiples are extremely elevated even in comparison with notoriously expensive industry peer Chipotle. Noodles' trailing P/E multiple of 168.26 and forward P/E multiple of 67 are way ahead of Chipotle's respective multiples of 51.92 and 39.56. Panera fares the best in this regard, with a trailing P/E of 25.56 and a forward P/E of 23.08. 

Growth drivers
The solid growth of Noodles has been driven by a combination of solid same-store sales growth and rapid new store openings. Not surprisingly, this combination is also what will drive future growth for the company.

The primary driver of sustainable same-store sales growth has been the company's ability to introduce new world dishes to consumers. Since the last quarter, management has released three new dishes: Alfredo MontAmore, Thai Hot Pot, and Pork Adobo Flatbread, which focus on Mediterranean, Far Eastern, and Latin American cuisines, respectively. 

While the three dishes above are part of the company's limited World Tour event, they have already proven successful at capturing new and loyal consumers. CEO Kevin Reddy explained, "One of the key differentiators of Noodles & Company is our ability to serve a world of flavors under one roof by being the only national chain that brings together cuisines from throughout the globe." 

With regard to new store openings, management at Noodles has been no less successful. In the third quarter, the company opened 20 new store locations, 15 of which are company-owned and five of which are franchised. At the end of the third quarter, the company's new store openings for 2013 stood at 41 total.

Management expects to have opened 41-42 new company-owned stores and an additional 9-10 franchised stores at the end of 2013. Weather permitting, management expects the company to come in at the high end of estimates with regard to store openings. 

The fact remains that Noodles only had 368 total restaurants at the end of the third quarter, which is significantly less than Chipotle's 1,539  and Panera's 1,736.   There still remains vast opportunity for Noodles to grow its store count in domestic markets. 

Of course, capitalizing on the growth opportunities that lie ahead of Noodles is only possible with a solid management team in place. Luckily, the company has already-proven leadership steering the ship. Both CEO Kevin Reddy and COO Keith Kinsey previously held high-ranking management positions at Chipotle during the company's early days of expansion. It's only reasonable to assume that the duo could do for Noodles in the future what they helped do for Chipotle in the past, which is build a powerful restaurant brand capable of rapid expansion.

Final thoughts
Despite a careening share price as of late, Noodles & Company is still expected to grow at a robust rate and it still has extensive growth opportunities in the form of store expansion in completely untapped geographic markets.

However, the stock's valuation is currently sky high and it makes even the expensive Chipotle Mexican Grill seem relatively cheap. As such, the stock should only be considered by long-term investors who are willing to take a risk and give the company's top-tier management a chance to prove they can replicate past successes.