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Noodles and Co - fairly valued for all its future growth

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July 19, 2013 – Comments (3) | RELATED TICKERS: NDLS , CMG

I read a good Motley Fool analysis of NDLS just now.  When valuing this kind of stock - a new restaurant chain that has proven its acceptance among consumers but has not come anywhere near to saturating its target market with locations - I always think of Peter Lynch, who (speaking of Taco Bell in the 80's) said that such a stock is a "screaming buy" when its P/E is 20.
If NDLS' P/E is 450 now, then it is 22.5 times as pricey as it would be if it were a Peter Lynch "screaming buy."  In other words, earnings would have to double 22 times before Lynch would consider it to be fairly priced at this level for its future growth.  If we ignore comps growth and focus only on new restaurants, that means that it would have to have about 7100 restaurants in order to be a 'screaming buy' at this price. 7100 Noodles and Co. restaurants, however, might pretty well saturate the American market!  They might have trouble opening new restaurants if there were already one on most city street corners - they'd be competing with themselves. I'm not a buyer of NDLS here.  If I shorted stock, which I don't, I would consider shorting it at these prices.  (Trouble with going short is you need a catalyst - something to make Wall St. wake up and smell the coffee - and I have no idea what that would be in the case of NDLS.) Still long CMG, by the way; still happy with earnings growth; still happy with my basis.  Hope you all got in at 241 when I told you to!

3 Comments – Post Your Own

#1) On July 19, 2013 at 4:04 PM, ikkyu2 (99.35) wrote:

Someday I will learn how to make carriage returns show up reliably in a Fool blog entry.  

 

Today, however, is apparently not that day.  Sorry, folks. 

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#2) On July 19, 2013 at 4:18 PM, Mega (99.95) wrote:

Enter should give you a line of breathing room. It looks like you have a Shift-Enter instead. Mostly useful for posting lists or tables.

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#3) On July 20, 2013 at 5:33 AM, valunvesthere (21.67) wrote:

I have written a Motley Fool blog about restaurants in August 15,2010 Restaurant Stocks that seem to be immune to nearly anything.. Things has changed alot, now that competition is so fierce that menus keep on changing as food prices fluctuate. Example as of present McDonald's has stopped offering Angus Third Pounders because the ingredients to produce them has gone up and McDonald's does not want to raise prices, they charge extra for lettuce and tomatoes on any orders, they charge on condiments if customer exceeds limit, and etc. Safe to say they are becoming a build-a-burger chain.

Noodles and Company traded on (Nasdaq: NDLS) might get acquired someday like P.F. Chang's China Bistro, Inc. when they use to be traded on (Nasdaq: PFCB) with international locations, but was acquired by Centerbridge Partners on July 2,2012 and is no longer publicly traded. It is a long shot with a probability it could happen like any other company.

At the time of writing there are 31 states with locations and there is more room to grow in the United States before going international equals growth. Their menu is based on noodles from around the world with American fusion and not hamburgers, chicken, BBQ, and etc. equals niche market with minimal competition. Who knows one day every American starts eating noodles like it was hamburgers, chicken, BBQ, and etc. equals trend.

+1 rec

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