Noodles & Company: Grossly Undervalued, Strong Buy

| About: Noodles & (NDLS)
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Summary

At $4.36 per share, Noodles & Company is only worth $240,000 per restaurant.

The company generates almost $1 Million in revenue per year per restaurant.

The company is by far the most attractive buy in the fast-casual space based off of its value per restaurant versus its revenue per restaurant.

There is no doubt that Noodles & Company (NASDAQ:NDLS) has had its fair share of problems since its IPO in 2013. The restaurant was revered as one of the top restaurant stocks to hit the street in some time. Since then, however, the stock has dropped almost 90% and currently sits at all-time lows around $4.30/share. While I don't believe Noodles & Company will have the success of some of its peers in the fast casual space (such as Chipotle), I do believe the company is beloved by many and its stocks is now a very attractive buy for a variety of reasons.

Value of Each Restaurant

When researching restaurant stocks, there is a simply metric I like to calculate to see what the market is currently valuing the company at compared to sales. The metric is:

Market Cap divided by Total Restaurants = Value per Restaurant

Versus

Revenue divided by Total Restaurants = Revenue per Restaurant

Doing this allows one to see how much it would cost to purchase one of the company's restaurants and how much revenue you would generate for purchasing one of the locations (on average).

Noodles & Company's sharp decline in share price has resulted in a market cap of just $120,310,000 and total restaurant count of just over 500. Based on this, and using the quick equation outlined above, Noodles & Company's restaurants are worth approximately $240,620 ($120M / 500). Believe me, I had to take several double takes after doing this calculation as well. My original thought was "how can a Noodles & Company restaurant be worth less than most people's homes?"

After realizing how much each restaurant is worth, I wanted to calculate how much revenue each restaurant generates. In order to do so, I used the second equation outlined above to calculate revenue per restaurant. Noodles & Company's revenue for 2016 is projected to come in around $490,000,000 - dividing that by the number of restaurants and you get $980,000 in revenue per restaurant ($490M / 500).

To relate the two metrics together and give you an idea of the of how the current valuation speaks to the company's ability to generate revenue, I take the second equation (Revenue per restaurant) and divide it by the first (Value per restaurant) to show you how much money you would be able to make by purchasing a Noodles and Company at is current valuation. Doing this allows you to see that if you were to purchase a Noodles and Company restaurant for its current value of $240,000 you would make 4.1 times that amount ($980,000) in revenue in the first year (net profit is a different story and difficult to use when many restaurants are in different stages of growth (e.g. Noodles vs Panera).

While most of us can't buy a full Noodles & Company restaurant for $240,00 (even if the company was willing to sell that low - believe me, they're not), we can get a small chuck of the action by purchasing a fraction of a restaurant by purchasing stock. I think most investors would jump on the opportunity to purchase a business for ¼ of its current annual revenue. Not to mention that Noodles & Company has seen double digit revenue growth for years.

Peer Comparison

To give you an idea of how Noodles & Company stacks up to some of its peers and others in the fast casual space, I have applied these same calculations to a few other restaurants in a side-by-side table:

Company

Value Per Restaurant

Revenue Per Restaurant

Return on Investment (Cost of Restaurant vs Revenue Generated in Year 1)

Noodles & Company

$240,000

$980,000

4.1x

Chipotle

$5,771,144

$1,990,049

0.34x

Potbelly

$841,225

$1,025,000

1.2x

Panera Bread

$2,304,568

$1,421,319

0.62x

Habit Restaurants

$2,484,071

$2,028,571

0.81x

Shake Shack

$14,047,619

$3,071,428

0.22x

Zoe's Kitchen

$2,585,647

$1,635,294

0.63x

As you can see for peer-to-peer analysis done above, the two best restaurant stocks to buy now base off of their cost per restaurant and revenue generate per restaurant are Noodles & Company and Potbelly whereas the two worse are Shake Shack and Chipotle.

To isolate Noodles here I would like to compare it to Potbelly (which is one of the better buys) and Shake Shack (NYSE:SHAK) which is currently the most overvalued:

In the case of Noodles vs Potbelly, the two companies are generating a very similar amount in revenue per restaurant whereas Potbelly is currently worth 3.5 times what Noodle's is worth. In order for Noodles to be worth a similar amount, the stock price would need to climb to $15.28.

In the case of Noodles vs Shake Shack, Noodles is generating 1/3 of the revenue that Shake Shack is per restaurant, yet Shake Shack is worth a staggering 58 times what Noodles is worth.

Given the fact that I don't believe Noodles will ever stack up to the likes of some of the all-stars in the fast causal space (such as Chipotle or Panera), I want to make it clear that I am not saying Noodles can or will grow as fast or as large as its peers. However, I do believe that Noodles has a strong brand image and a successful track record for growing their business. These last two years have taken a hit on the company's profitability as it decided to expand much faster than ever before but it is now in a position where it can capitalize on its restaurants maturing in new areas.

Base off of the current valuation of Noodles, I recommend the stock as a strong buy. Given the math above, if Noodles and Potbelly are making about the same in sales, and the company's restaurants were worth the same based off of their revenue generation, Noodles should be worth $15.28 per share. I think $15.28 is a bit of a stretch at this point because of the company's recent financial reports and the pessimism surrounding the stock, but I do believe that the company is a buy below $10 per share. At the current price of $4.36, Noodles and Company has a 130% upside if it gets back to $10. For this, I recommend Noodles & Company as a strong buy.

Oppositely, Shake Shack is a strong sell. I would suggest selling the stock if you own it currently or shorting it if you're interested in short positions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.