Noodles & Company Vs. Chipotle Mexican Grill: Which Is the Best Buy Now?


Source:  Noodles & Company

Let's give Noodles & Company (NASDAQ: NDLS  ) a free pass on the first quarter. Sure, its same-store sales were negative as it blamed the winter weather even though Chipotle Mexican Grill (NYSE: CMG  )  looked like it could sell snow to Eskimos with a whopping 13.4% gain for the identical quarter. Fine, ignore that. However, going forward, it's still hard to get excited about Noodles & Company just yet.

Noodles & Company's results
Don't get me wrong. Noodles & Company's first-quarter results weren't terrible and the company itself is doing OK. It doesn't need to be the next Chipotle Mexican Grill to succeed. However, for shareholders to share in that success over the long term, they need to pay a reasonable price.

Revenue did rise 10%. Systemwide same-store sales slipped 1.6%, which is far from the end of the world. Adjusted net income stayed flat at $1.4 million or $0.05 per share. Hey, that's $1.4 million more than it had at the beginning of the quarter.

Source: Noodles & Company

The rest of the year
Noodles & Company blamed the "unprecedented weather throughout the country," especially with many of its locations directly in the path of the storms. What appeared to be lacking, however, was the follow-through when the storms cleared up. Chipotle Mexican Grill reported that riots almost occurred when its stores reopened, which immediately boosted sales and made up for the shortfall. This speaks loudly of its brand and outlook going forward.

On its April 29 conference call, Noodles & Company was still in the process of seeing its sales "gradually" recover. For Chipotle Mexican Grill we're talking one day, then it was bigger than ever. Noodles & Company is still waiting.

Chipotle Mexican Grill is guiding for high single-digit same-store sales growth. If you've been following Chipotle Mexican Grill even casually, you've probably noticed that the company often likes to sandbag its guidance. Don't be surprised if Chipotle Mexican Grill reports much bigger numbers for 2014.

Meanwhile, Noodles & Company is only looking for between 2.5% and 3% same-store sales growth for 2014. Again, don't get me wrong. This is certainly not bad, and if it achieves this it will be the envy of many restaurant chains. However, to justify its valuation it's going to need more than that. Sure, its expected restaurant-unit-growth ranging between 16% and 24% is extremely nice, along with its 25% earnings-per-share growth, but this is still doesn't support the current stock price.

Show me da valuation
Based on the current share price, Noodles & Company trades with a P/E of around 63 based on guidance for adjusted earnings growth of 25% over 2013 or $0.50 per share for the year ending December 2014. Chipotle Mexican Grill trades with a P/E of 40 based on the current share price and analysts' estimate of $12.51 in EPS for the year ending December 2014. Analysts expect around another 25% earnings growth for Noodles & Company and around 27% growth for Chipotle Mexican Grill over the following year.

It's hard to make a fundamental case even if you torture the numbers to say that Noodles & Company is the better buy, considering its much larger P/E, slower momentum, and similar growth expectations. However, there could be something about the brand itself, I suppose, that could make it more popular in the future or something about Chipotle Mexican Grill that's more faddish and could cool down its demand.

While anything is theoretically possible, the better risk and reward for now seems to rest with Chipotle Mexican Grill, but that could certainly change. If only Noodles & Company were a lot cheaper, I would be all over it like white on GMO-free rice. However, that's easy to say about any profitable and growing company, even Noodles & Company, and especially Chipotle Mexican Grill.

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Related Tickers

9/16/2014 4:00 PM
CMG $654.20 Down -1.65 +0.00%
Chipotle Mexican G… CAPS Rating: ***
NDLS $18.87 Down +0.00 +0.00%
Noodles & Company CAPS Rating: *

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