- 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:
We suspect the recent rally is due largely to technical trading action, as short-term traders are always looking for momentum stocks with low market caps that can move quickly with relatively little volume. Even after more than doubling, NDLS sports a market cap of just $325 million.
In addition, with more than 22% of the public float sold short according to Yahoo Finance, the recent run-up has likely fed on itself, as shorts scramble to cover as the chart looks better to near-term focused traders.
Given the quick run-up, we believe the shares are unlikely to hold the gains longer term. In addition, because the gap between our estimate of fair value and the current stock price of $7.90 is so wide, we feel that our lowest "1" rating now, in part, reflects the opportunity here for short sellers to use the share price strength to try and profit from the next big move, which appears more likely to be downward.
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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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