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I recently wrote an article which evaluated the comparable companies to Noodles & Company (NDLS). While digging through 10-Ks and looking at comps is an important first step in the research process, the next level of analysis is to model out projections to determine where fair value lies.

I've put together a simple, yet useful model. The point of this model is to test the sensitivities of many of the important variables that will affect Noodles' share price. My model projects out the income statement down to net income, along with the relevant balance sheet and cash flow items. The end result is an implied share price over the next several years.

The value of this analysis is that we can watch Management present their earnings quarter after quarter and see if they are tracking these metrics/assumptions. Stock prices don't operate in a vacuum, but as investors, it always helps to know what we are shooting at.

Income Statement Assumptions:

Net New Company Stores - new company stores opened each year, net of any closures

Net New Franchise Stores - new franchise stores opened each year, net of any closures

Same-store sales growth - for purposes of my model, this is the growth rate applied to stores owned for over 1 year

New Store Ramped Sales - sales per store, after fully ramped

Franchise Revenue per Store - revenue from franchise stores, per store

Company Owned CM Mar. - contribution margin from company owned stores

Operating Exp. % of Sales - operating expenses as a percentage of total revenue

Balance Sheet / Cash Flow Assumptions:

Capex / Co. New Store - startup costs per new company store

Maintenance Capex / Co. Store - store improvements and any other capital expenditures per company existing store

D&A / Co. Store - depreciation per store

Working capital - cash use from changes in current assets and current liabilities

Operating Exp as a % of Sales - operating expenses; used as a plug to go from contribution margin down to EBITDA

Case #1 - Management Case:

See the detailed model below:

(click to enlarge)

The Management case is what I would consider an upside case. It does not represent the "best case", as Noodles could potentially knock the ball out of the park and beat all historical metrics. While that is certainly possible, the Management case below serves as a realistic upside case in which I've used assumptions provided by Management and metrics that assume they perform on par with their competitors as they grow.

Relevant assumptions changed:

-900 stores opened by 2017 (Management has said they plan to be at 2,500 stores in the next 15-20 years)

-7% same-store growth in '13 and '14; 6.5% in '15-'17 (same range as Chipotle (CMG) and Panera (PNRA))

-Decreasing operating expenses as a % of sales, reaching 17.3% EBITDA margins by '17 (this would be slightly below Panera and 2.5% below Chipotle)

-EBITDA multiple that contracts closer to Chipotle and Panera, reaching 23x in 2017 (where Chipotle traded a few years after its IPO and initial growth phase)

Year End

Stock Price

2013

$57.72

2014

$69.63

2015

$85.25

2016

$105.38

2017

$146.74

Case #2 - Base Case:

See the detailed model below:

(click to enlarge)

I would call this my "investment case". The assumptions and metrics should be reasonably achievable by Management. As such, I would want to see solid returns on my investment, realizing that I have some degree of confidence these results will come to fruition.

Relevant assumptions changed:

-750 stores opened by 2017 (this would match Chipotle's 19% CAGR after their IPO, which went through the recession)

-6.5% same-store growth in '13 and '14; 6.0% in '15-'16; 5.5% in 2017 (this would slightly trail its peers)

-Decreasing operating expenses as a % of sales, reaching 16.3% EBITDA margins by '17 (this would be trail its peers)

-EBITDA multiple that decreases to 20x in 2017 (this would be below Chipotle's current multiple, and well below Chipotle's multiple at a similar growth stage)

Year End

Stock Price

2013

$57.46

2014

$63.38

2015

$73.61

2016

$88.03

2017

$98.31

Case #3 - Downside Case:

See the detailed model below:

(click to enlarge)

Again, this is by no means the "worst case", or even a "bad" case. This case is meant to show us what would happen if Management materially misses their growth expectations, but Noodles still remains a viable company for the long term.

Relevant assumptions changed:

-612 stores opened by 2017 (basically no growth acceleration; instead, a continuation of the current growth rates)

-5.5% same-store growth in '13- '15; 5.0% in '16-'17 (this would significantly trail its peers)

-Decreasing operating expenses as a % of sales, reaching 16.0% EBITDA margins by '17 (this would trail its peers)

-EBITDA multiple that decreases to 18x in 2017 (this would be a discount to Chipotle and modestly above Panera, which is at a much more mature stage)

Year End

Stock Price

2013

$56.96

2014

$61.99

2015

$68.98

2016

$71.84

2017

$71.41

Conclusion:

Growth stocks are notoriously hard to value based on traditional valuation methodologies because there really are so many factors that can impact how investors perceive the future of the company. Further, growth stocks are even more susceptible to emotional investing which can lead to lots of volatility. With that said, I find it helpful to at least try to map out how I plan to get from A to B before I make an investment. Hopefully, this gives you a starting point to think about value and provides you with a framework of what to expect from Management in future earnings reports.

The modeling above leads me to believe that Noodles is a compelling investment. My base case above would yield a 22.1% IRR through 2017 if you purchased the stock at $40 today. That means you got 2.5x your money in 4.5 years…not too shabby! There will no doubt be many bumps in the road for Noodles' stock price over the next few years, but I can confidently say that I love the stock just as much as the food.

Source: Modeling Out The Fair Value Of Noodles' Stock Price