There's nothing wrong with scooping up shares of growth companies and setting high expectations for them, but the slump Thursday at Noodles & Co. (NDLS) is yet another reminder that Wall Street's generosity can be vastly excessive and its punishment swift.
Although the Broomfield, Colo.-based Pad Thai and spaghetti seller still has tremendous prospects, stationed as it is in the ballyhooed fast-casual restaurant subset, it's also stayed overheated in a super-hot industry that significantly outperformed the market last year. That's the case even with what's been a muted showing for Noodles since its stock debut in mid-2013.
Recently, the shares were losing 6.8% to $36.87, the fourth-worst day in its brief trading history, as its financials weren't a match for the goals outsiders have set. In the fourth quarter, Noodles earned 11 cents a share on revenue of $91.5 million, a top-line increase of 17.5% from the same period a year earlier. Analysts surveyed by FactSet were looking for a profit of 12 cents and revenue of $92.1 million, so Noodles missed on both.
As for the 2014 fiscal year, Noodles is projecting revenue of $406 million to $412 million and an earnings improvement of 25%, implying an adjusted profit of 50 cents. The consensus is for earnings of 51 cents and revenue of $409.1 million, meaning Noodles could fall short here, too. Based on its own prediction, revenue at the low end of its range would be up 15.7% from 2013.
In Noodles' defense, that's a pretty smart advance on each line. To its detriment, it simply had to invoke the weather, an old favorite retailers are fond of using to explain away their woes. There's clearly truth to it, with snow and ice hitting the U.S. hard in recent weeks. However, it's also far from ideal when the old saws are trotted out by the next big thing. Some degree of bad weather is a fact of life, after all, yet we push on. First-quarter earnings will probably be cut by 3 cents a share owing to the winter storms, Noodles believes.
Regardless, the numbers aren't the disaster the selloff suggests. Thanks to customizable dishes and better-for-you options, Noodles has emerged at the perfect time, offering everything a modern analyst or urbane diner would hope to have in these let's-find-the-next-Chipotle (CMG) days. Even so, it probably needed this, and it shouldn't be a shock if a bit more air comes out of it.
Here's the reason. Noodles' initial public offering priced at $18. Once trading got underway, it surged, as IPOs tend to do, and it closed day one at $36.75. Since then, it's done little, but that one-day pop was enough to take its next-12-months price-to-earnings ratio past 70. (Prior to the earnings that were released late Wednesday, Noodles was up 7.6% from where it ended its first day. It's now given back all of that.) Even factoring in the day's slide, it's still carrying a 68 forward multiple. While investors always will pay up for outsized potential, this is a name that can't hit any bumps.
Compared with 37 other restaurants surveyed, Noodles is more than twice the group average of 27.2 -- they climbed more than 50% last year. The only other stock above 60 is Potbelly (PBPB), a sandwich chain that also went public last year and that itself hasn't done retail investors any favors, dropping 31% from its initial close.
Not surprisingly, Noodles also has one of the highest P/E-to-growth ratios, currently at 2.4 and lagging only Potbelly and Olive Garden owner Darden Restauarants (DRI). On the whole, restaurants trade at a fairly sizable premium to their average P/E over the past five years, and considering Noodles is well above its peers, any hint of weakness would be met harshly.
It will have plenty of time to redeem itself. It's got plans for as many as 50 new company-owned restaurants this year and up to 15 franchised units on top of the 380 locations it had at the end of the year. Of course, it's got room to disillusion investors again as well, even at a double-digit growth rate.
- Investment & Company Information