Missed Noodles’ IPO? Meet Dining’s Unsung Hero

Call it the billion-dollar bowl of noodles that is shaking up the casual dining industry – and forcing investors to ponder, yet again, which of the growing number of companies in this sector to allocate their dollars to. That’s the bottom line on the heavily-oversubscribed Noodles & Co. (NDLS) initial public offering earlier this year: in the immediate aftermath, the stock price more than doubled from the $18 IPO price today.

NDLS Chart

NDLS data by YCharts

The question is whether the market is now starting to get overcrowded, as an ever-growing number of food providers battle to learn from and compete with Starbucks (SBUX), which helped to introduce the concept of cheap, affordable quality in the sector. Choice is great, whether you’re an investor or a diner looking for an alternative to the ubiquitous fast-food hamburger, and that is why chains like Noodles & Co. have thrived. Noodles is chewing up some of the market share that once belonged to Chipotle Mexican Grill (CMG) (feel like a burrito bowl?) under a former Chipotle executive, Kevin Reddy, who has decided to cut across traditional lines by offering noodles of all kinds, from Asia (Pad Thai) to Italy (spaghetti) and to classic American comfort food (Mac & cheese).

When you screen the menu of investment options, however, you may be in search not just of growth or the kind of momentum that Noodles has displayed, but also value and sustainable growth. Moreover, your asset allocation policy may not give you the option of stuffing your portfolio with an indigestible mix of Chipotle, Noodles and other casual dining stocks. If that’s the case, you may want to take a closer look at Panera Bread (PNRA), a company that isn’t as much in the news as either Chipotle or Noodles and may offer a better way to play growth in this hyper-competitive sector.

Panera offers both folks in search of a quick meal and investors the same appetizing alternative to the likes of McDonalds (MCD) and Yum Brands (YUM) that other casual dining chains do; among those that are publicly traded, it also offers a more modest valuation, as measured by PE ratio.

PNRA PE Ratio TTM Chart

PNRA PE Ratio TTM data by YCharts

True, same-store sales growth at Panera looks underwhelming, rising only 3.8% (below the 4% to 5% range the company had suggested it would deliver) while those at Noodles are expanding at a rate of 5.2% and at Chipotle, a more impressive 10%. And the company clearly is struggling to manage the appetite for its food during peak hours; the way orders are processed leads to a backlog on the food preparation and delays for irritable customers. And the company itself seems to be more cautious, cutting its own outlook for earnings to between $1.32 and $1.36 a share for the third quarter and predicting lower-than-expected growth in profits for the full year of 15% to 16% instead of 17% to 19%.

Still, Panera hasn’t had a quarter in which its earnings haven’t grown since 2008, and the second quarter was no exception: profits rose 16% on an 11% increase in revenues, suggesting that the company’s margins are improving. (Certainly, analysts have reported that the company has succeeded in getting its customers to swallow some of the higher food prices of the last year by successfully boosting the cost of its Cuban paninis and other popular products. Also, analysts who do market research believe that the company can readily identify and execute changes to make its service more efficient and customer-friendly, even as Panera continues to expand its number of outlets.

PNRA Net Income 5 Year Growth Chart

PNRA Net Income 5 Year Growth data by YCharts

And Panera clearly isn’t going to let Noodles come and nibble away at its market share unchallenged. The company has been rolling out a new series of pasta dishes as alternatives to its core offerings – soups and sandwiches – that include such calorific delights as tortellini Alfredo. Longer-term, the company insists that its catering division offers tremendous upside potential, and it’s true that the margins on this kind of business tend to be higher.

As with many newly-public companies, it remains to be seen whether Noodles can demonstrate, on a consistent basis, that it deserves the high valuation that it has been awarded at least in part because of its short-term growth record. Chipotle, with the more proven business model, trades at a premium to Panera – and that premium is expanding. For investors looking not just for a value-priced meal but a value-priced option on the casual dining sector, Panera clearly belongs at the top of the order list.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  IPOs   

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