Fast Casual restaurant chain Noodles and Company (Nasdaq:NDLS) priced its IPO June 27 at $18. In its first day of trading it closed up 104.2%, one of the top first day returns for U.S. IPOs since 2001. It's clearly time for those who got shares in its IPO to sell--Isn't it? I'll have a look to see if there's any reasons why you shouldn't take profits. 
 
Highlights of the IPO
Noodles & Company originally priced its shares between $13 and $15. 

  • By the time of its IPO less than two weeks later its shares sold for $18 each netting the company $100.4 million (includes over-allotment) after the underwriter's fees and other offering expenses. 
  • It intends to repay $85.9 million of its $100.3 million in outstanding long-term debt saving the company approximately $3 million in annual interest expense. 
  • Argentia Private Investments, one of Noodles & Company's private equity owners, the other being Catterton Partners, received a $400,000 special dividend in conjunction with this offering. There will be no dividends paid by the company.
  • The two private equity partners acquired Noodles & Co. on December 29, 2010.
  • Catterton has significant restaurant experience with Outback Steakhouse, P.F. Chang's and others. Argentia is a private equity investment vehicle for PSP Investments, the pension investment manager for the Canadian Public Service, The Mounties, and the Canadian Armed Forces. 
  • While the terms of the original purchase by Catterton aren't available, it's clear that debt wasn't a big part of its purchase as it increased by only $43 million in fiscal 2010. According to the prospectus, Catterton, Argentia and some of the management invested $201.5 million in equity to buy the company. So, a possible deal price adding together the two figures is $245 million. 
  • Noodles & Co. has 291 company-owned restaurants and 52 franchised locations in 26 states and the District of Colombia.
  • Over the last eight years it has gone from 100 restaurants to 343 as of the end of May. 
  • The average restaurant comes with a total cash investment of $725,000, net of tenant allowances. 
  • The average restaurant generates $1.18 million in revenue and $263,000 in store profit annually resulting in a payback of 3-4 years. 
  • System-wide comparable store sales growth in 2012 was 5.4%, higher than in both 2011 and 2010.

 
What You Get
Clearly, you're buying into a restaurant chain that's growing. In 2013, it plans to open between 38 and 42 company-owned locations along with six to eight franchise locations. But don't expect its franchise development to get much busier. The company uses franchising to raise brand awareness in areas where it doesn't intend to locate in the short to medium term. In that regard it's very much like Starbucks (Nasdaq:SBUX), who uses a licensing format in places where it doesn't plan to invest directly.
 
SEE: How To Analyze Restaurant Stocks

Noodles & Company's revenue growth is best described as workmanlike. Since 2008, it has grown from $169 million to $297 million at the end of January. That's a compound annual growth rate of 15.2%. In terms of operating income, it's managed to grow 67.5% annually on a compounded basis over the same period. Its management team, which consists of several former McDonald's (NYSE:MCD) and Chipotle Mexican Grill (Nasdaq:CMG) executives, has done a good job building a stronger bottom line. In the interim as it ramps up store openings you can expect profits to be somewhat volatile while it builds out its footprint across the U.S. It expects to be able to grow to 2,500 stores over the next 15-20 years. From this perspective the potential of its concept is tremendous.
 
Valuation
At its IPO price of $18, Noodles & Company had an enterprise value 14.6 times its adjusted EBITDA of $36.3 million. When compared to Chipotle, which has an enterprise value 19 times EBITDA, it's more than fair. Fast forward to July 2 as I write this and its enterprise value has ballooned to 38 times EBITDA or twice the valuation of Chipotle. Given its growth prospects it's certainly not outrageous--but it isn't cheap either. 
 
Daniel Gross, global business editor at Newsweek's Daily Beast, believes Noodles & Company's underwriters blew its IPO pricing costing the company $100 million in gross proceeds. Mr. Gross is just plain wrong. The fact that the stock doubled has little to do with whether its shares were priced accurately or not. Sure, in hindsight, it might have been able to go out at $24 per share (19 times EBITDA); however, the exercise isn't to see how greedy a company can be but rather to establish a market for its shares. Whatever Mr. Market decides after that is out of its hands. Pricing it at $18 ensures you sell all 5.3 million shares available in the IPO and don't end up with egg on your face as it tanks on its first day of trading. If anything, this tells us investors still have a big interest in owning stocks. And that's a good thing. 
 
Bottom Line
If I was one of the lucky ones who got shares at $18, I'd be a definite seller at this point. If you weren't able to get in on the IPO (that's most of us) I'd wait for it to drop back into the mid-30s. While its potential appears huge, the unknowns at this point are also significant. Better safe than sorry. 

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  3. Active Trading Fundamentals

    The Companies of Peter Theil's Founders Fund

    Learn about the major public companies that Peter Thiel has invested in and companies that are on the verge of going public at multibillion-dollar valuations.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!