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Downgrading Noodles & Co. On Extreme Valuation, Lackluster Brand

Apr. 12, 2018 2:39 PM ETNoodles & Company (NDLS)24 Comments


  • NDLS stock has rallied 30% since March 1st for little reason that we can tell.
  • Using management guidance for 2018, we estimate the shares are overpriced by roughly 40 percent.
  • We can no longer maintain neutral "2" rating, therefore we are downgrading to "1"

Looking at the stock chart lately, one might think fast casual chain Noodles & Co. (NASDAQ:NDLS) was having a renaissance, having more than doubled from their 52-week low:

And yet, the numbers tell a different story. NDLS management has issued guidance for only 1-5 new locations in 2018, while same store sales are expected to remain around flat ("modest" growth is expected, whatever that means). This comes on the heels of a 2017 which was less than stellar, with same store sales falling 2.4% and more than 10% of their system-wide units closed permanently.

We have been neutral on NDLS ("2" rating on 1-3 scale, with three being highest), as poor operations was priced into the severely beaten down stock. However, given the rally in recent months, we have chosen to downgrade, as we see no reason to believe the company has all of the sudden uncovered a plan to take market share in a crowded fast casual space. We simply do not believe their offering is unique or compelling enough for consumers to increase visits.

Below you can see the company's 3-year operating performance, as well as our estimate of 2018 results based on management's own guidance:

Given a largely flat unit count (new openings offset by the closure of underperforming locations) and margins, we fail to see company EBITDA going much above $30 million, yet the current stock (just below $8) implies an enterprise value of some $383 million. Why this company deserves to trade at nearly 13x EV/EBITDA escapes us. Instead, we would use an 8x multiple (industry average for chains that largely own and operate locations -- the Noodles system is just 14% franchised) and arrive at a stock price of roughly $4.50 per share, more than 40% below current prices:


This article was written by

Dining Stocks Online (DSO) publishes investment research on the dining sector of the consumer discretionary industry. DSO's research is compiled and edited by investors with more than two decades of experience assisting in the allocation of capital to the public dining sector, both personally and for advisory clients. DSO aims to become a valuable provider of niche research exclusively devoted to publicly traded dining chains.

Analyst’s Disclosure: I am/we are short NDLS. 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.

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Comments (24)

I sold half of my calls, but letting the rest ride.
That mid-May pop lead to 250% options profits. I sold the options but I am keeping NDLS on my watch list. I look at technicals first and sometimes I am happy to find some supporting news. Shorting against the trend is not a good idea.
I feel like it won't go below $7.30 on Friday, but may briefly hit $8.50.
Obviously there is no relation between company results and the stock price at this point.
Mia culpa, it is holding 8.50+ instead hitting it briefly. I imagine it is happening because of long call holders that are not going to make any money anyways and would be pressured to do "sell to close at the bid" before expiration
OK, here is Chipotle. Negative 3,5% traffic after 5% price increase. And 3 quarters of declining (slightly) AUVs. Do you think we will see NDLS rally on similar results?
What would you rather buy... rice or noodles?
Apples to oranges. Noodles & company = bad business model, food, service and experience
CMG = great business, service and experience and food. But one thing they both have in common is they are both overvalued. But to answer your question, it's not what I'd rather buy, but I'd go to CMG before I go to NDLS if I had the choice.
CMG reported negative 3.5 traffic in Q1. Does it mean noodle will report negative 5%-6% ? Because it should collapse on such data.
Some real seller is dumping. Must be one of those "unethical" small funds.
iamaweugene profile picture
Now, someone is buying. The stock just shot up!!
After they triggered the stop loss trades @ 7.20.

Longs, remove stop loss, they are seeing it!
I have some $7.50 calls on NDLS. I noticed that the short interest has gone down. That's good news for the shorts since it reduces the chance of a new short squeeze. Could be a good short at $10.00.
Noodle will report Q-1 in 3-4 weeks - before May expiration
you know thats not goof news for the longs be another disaster thid company is so lost its ridiculous
As far as earnings all they really need to do is to maintain flat AUVs and flat EBITDA in order to save the stock.

As far as the stock itself they need to maintain certain daily moving averages and linear regressions on "mild viagra", assuming no short attack. Especially 20 is important
leeo268 profile picture
This short squeeze can easily get to $10+. Technical and Chart traders' favorite. Best to wait for a better price.
Every time I go there the food is quick and cold. They should rename their restaurant chain “Quick and Cold.” LOL
Look at the tape, longs are defending $7.50 level . I better wait until most shorts are dead.
noodles is dead in the water they make no money and closing unprofitable stores which is a bunch of them same store sales down every quarter since the went public this dog should be back to 3 bucks soon
I am very knowledgeable about this company, and their dumb and dumber management and board of directors helped good shorts to make easy living. I made tremendous calls on this ticker since the very top. However, as of now they (3 long entities) are in control of price while shorts from below $5 are still here and they will be taken out via pain trade. After it happens we should be able to take the piggy to zero
Breadnbowl ...how high you think NDLS will go before the price gets hammered down?
Who is going to take it down? Noodle Shorts are not organized, while 3 longs hold most of the shares
Your statement "NDLS management has issued guidance for only 1-5 new locations in 2018, while same store sales are expected to remain around flat ("modest" growth is expected, whatever that means). This comes on the heels of a 2017 which was less than stellar, with same store sales falling 2.4% and more than 10% of their system-wide units closed permanently" reflects a potential inflection point to a brighter tomorrow. Same store sales will move into the black while under performing restaurants will be replace by new restaurants in already established brand recognize locations. I am not saying I buy it, but profitable days lay ahead even if they are just pennies.
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