Seeking Alpha
Profile| Send Message|
( followers)  

During my college days, there was a cool little restaurant down the street from my apartment that I ate at quite frequently. At the time, the "fast casual" restaurant concept was in its infancy, but has since taken off as evidenced by the success of companies like Chipotle (NYSE:CMG). The idea is to carve out a market niche above fast food, but below a traditional sit-down restaurant. These companies offer quality food at cheaper price points than sit-down restaurants, with no waitress that you need to tip. As a college student, Noodles & Co. (NASDAQ:NDLS) was a great place to get a good meal at a good price, while still being able to sit down and have a conversation with friends over food. Now that I live in the NYC area, I haven't had the fortune to enjoy Noodles & Co. recently, but when I heard the IPO announcement, I knew I had to at least take a look at this company.

One of the first assignments you get as an investment banking analyst is called "spreading the comps", which involves preparing a side-by-side analysis of the relevant metrics of the company you are evaluating, along with its competitors. I've pulled together such an analysis for Noodles, and have compared it with Panera Bread (NASDAQ:PNRA), Jack in the Box (NASDAQ:JACK), Chipotle, and Cosi (NASDAQ:COSI). I chose these companies because they all play in the fast casual space, so their metrics should be the most relevant for comparison purposes.

This is my first article, but given that I work in the financial services industry (non-public equities), hopefully you find these metrics helpful:

My full comparison file

Sales Growth:

Company

2010 - 2012 Sales CAGR

Noodles

16.6%

Panera

17.5%

Jack

-9.8%

Chipotle

22.0%

Cosi

-5.5%

Chipotle has clearly far outpaced the competition in terms of top line growth. According to Technomic, the fast casual concept segment grew by 8.4% in 2011, and the 500 largest restaurant chains in the US grew 3.5%. This would imply that Chipotle, Panera, and Noodles all have fantastic growth rates.

Winner: Chipotle, but Panera and Noodles have strong growth rates as well

Company-owned Store Growth:

Company

2010 - 2012 # Stores CAGR

Noodles

14.1%

Panera

10.5%

Jack

-24.4%

Chipotle

14.0%

Cosi

-4.9%

The ability to open new stores is an essential growth component to any company in the fast casual space. A new store may take 6-7 months to ramp up, but after about a 1.5-2 years (each company defines it differently), that store is considered a "same-store", and grows at a more steady rate. For these companies to keep up their rapid growth trajectory, they need to keep opening new stores, as long as they are in good markets.

Noodles has led the pack in this respect, but Chipotle is right behind it in second place. Since this industry is so young, the risk of saturation should be low. Noodles especially should have a lot of runway to keep opening new stores. In fact, management projects it can grow to 2,500 stores in the next 15-20 years.

At the end of 2005 (approx. when it went public), Chipotle had 481 stores. With Noodles projected to have 374 stores by the end of 2013, one could say Noodles may have the same runway that Chipotle had in front of it when it went public.

The first 4 years after its IPO, Chipotle grew stores at a 19% CAGR. By the way, that 19% CAGR is right through the recession (2005-2009). If Noodles matches this CAGR, they will have 750 stores in 4 years. I think that this is attainable given their history and Chipotle's success in doing it already. Not to mention, Noodles' CEO and COO came from Chipotle and were a large part of driving all those store openings.

Winner: Noodles & Co. and Chipotle

Restaurant Contribution Margin:

Company

2012 CM Margin %

Noodles

41.7%

Panera

20.2%

Jack

15.1%

Chipotle

27.1%

Cosi

8.5%

To me, this is a very important metric because it measures the operating profitability at the restaurant level, excluding franchises. Larger companies may have a better EBITDA margin, but they also have a larger base to allocate their corporate overhead. Noodles is blowing away the competition with regard to their CM margin. This is hugely positive for Noodles as they appear to be very profitable at the restaurant level. Further, once they grow their restaurant base, they should enjoy the benefit of fixed cost leverage, which means more of this CM will drop to the bottom line. That could mean that Noodles could see growth in their EBITDA margins going forward.

Winner: Noodles

EBITDA Margin:

Company

2012 EBITDA Margin %

Noodles

12.1%

Panera

17.5%

Jack

13.6%

Chipotle

19.8%

Cosi

1.7%

As mentioned above, EBITDA margin is an important profitability metric, but should favor the larger organizations as they have a broader base to spread their overhead. Aside from Cosi, all four of the other companies have strong EBITDA margins. Chipotle is a step above the rest, which continues the theme we've been seeing that it is run by a world class operating team.

Winner: Chipotle

Per Store: Sales / CM / EBITDA:

The below is based on year-end restaurant stores for Sales and CM, and year-end total stores EBITDA for 2012. New stores opened for the year take time to fully ramp up, so a same-store analysis would show higher numbers than these; however, since I am using the same methodology for all companies, this is still a relevant metric.

Company

Sales

CM

EBITDA

Noodles

$1,077.0

$449.3

$111.0

Panera

2,323.0

470.2

226.3

Jack

2,228.9

335.5

93.5

Chipotle

1,937.0

525.1

383.0

Cosi

1,263.4

107.8

13.0

Chipotle dominates these metrics as well. EBITDA of $383k per store is an enormous amount of earnings to generate per store. As Noodles is smaller, it has a larger distortion from new store openings. If you divide Noodles' 2012 EBITDA by 2010 company owned stores to adjust, it would generate $171k of EBITDA per store. I believe that Noodles will close the gap here as they grow.

Winner: Chipotle

Revenue, CM, and EBITDA Growth from '10 - '12 divided by Cumulative Capex:

This metric shows us the return that each company is generating from the Capex investment it is making. It's important to note that Capex is an investment for the future, but comparing the total Capex to the growth the company generates, we can get a sense for the return each generates on their Capex investment.

Company

Sales

CM

EBITDA

Noodles

0.8x

0.8x

0.1x

Panera

1.2x

0.3x

0.3x

Jack

NA - Decline in Sales/CM/EBITDA

Chipotle

1.9x

0.5x

0.4x

Cosi

NA - Decline in Sales/CM/EBITDA

Winner: Chipotle

Valuation Multiples - EV / EBITDA and EBIT:

Based on 7/3/13 opening stock price. Valuation needs to be analyzed in the context of each company's growth prospects. Obviously, a company that can grow sales and earnings faster deserves a higher multiple.

Company

EBITDA '12

EBIT '12

Noodles

37.4x

69.4x

Panera

14.2x

18.8x

Jack

10.2x

19.1x

Chipotle

20.8x

24.7x

Cosi

18.3x

NA

Conclusion:

After taking a first glance, high level analysis of the operating and financial metrics of Noodles and its comparable companies, it is clearly an attractive company with a bright future. That being said, the valuation after its IPO has surged to nose-bleed levels. While I would be a buyer of Noodles, Chipotle is trading for a much more modest valuation and is leading the pack in almost every metric. The question is, can Noodles grow fast enough to justify these high valuations? For my next article, I'll model out what future metrics Noodles needs to hit to more precisely circle a fair valuation.

Sources: Company 10-Ks: Panera , Chipotle , Jack , Cosi , and Noodles & Co. IPO Prospectus

Source: Noodles & Co - Great Food, Great Stock?