I've come to loathe precedents. Nothing is more annoying than someone telling you that their favorite new book is the next Harry Potter or that the movie they just saw is going to be the next Godfather. So it shouldn't be a surprise that I'm not overly keen on the selling of Noodles & Company as the next Panera or Chipotle or Buffalo Wild Wings . Instead, maybe we can judge the business on its merits, instead of on the success of restaurants that came before it.
My whining doesn't change the fact that the company IPO'd at $18 and is now up to $47 -- and it's only been three trading days. Clearly, someone is very excited about bowls of noodles.
The basics of noodles
Noodles has about 350 locations in the U.S., with all but 52 of them owned by the company. The stores sell noodles, unsurprisingly. The idea is that you can get all kinds of international-themed noodle dishes, from Pad Thai to mac and cheese. The company also serves salads, soups, and sandwiches for the noodle haters who for some reason are going to a place called Noodles & Co.
The simple business model makes the company attractive. The fact that it's run by Kevin Reddy, the former COO from Chipotle, means that it invites comparison. Reddy helped Chipotle grow from a 13-location chain into the beast that it now is.
For all his pedigree, Reddy is still managing a work in progress. Last year, Noodles' operating margin came in at just 5.3%. Chipotle managed a 14.6% operating margin in 2012, Buffalo Wild Wings hit 7.9%, and Panera came in at 13.3%. The fact that margins are lower now doesn't mean that they'll stay that way, but Noodles seems to cater to a more price-sensitive crowd than the other three.
Why nothing will change, or maybe it'll all change
Noodles has been bid way, way up. The company has a P/E of 214 right now -- a bit rich. Its stock market competitors top out at a P/E of 40 for Chipotle. All in all, a lot is riding on Noodles' ability to use the next few quarters to expand pretty quickly.
The company is planning to use most of the cash from the IPO to pay off debt, which will give it more freedom to invest its cash back into the business and should help boost EPS. Even so, I think right now Noodles is riding on a lot of hope and not a lot of substance.
If the market falls out of love -- and it's only been three lust-filled days so far -- Noodles could come crashing back to Earth pretty quickly. But investors could just as easily keep riding the high, pushing the stock further up. Right now, the price is in the hands of the hopeful, and there's no telling what they're going to do. That's why I'm steering clear of Noodles & Co. until it has a few more solid quarters under its belt and a longer track record of success in the market.
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This article was originally published as Noodles & Company: Serving Up a Heaping Bowl of Hypeon Fool.com
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