Noodles trades at $0.94 per share and has moved almost in lockstep with the market over the last six months. The stock has lost 14.5% while the S&P 500 is down 13.6%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Noodles, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the more favorable entry price, we're swiping left on Noodles for now. Here are three reasons why you should be careful with NDLS and a stock we'd rather own.
Why Do We Think Noodles Will Underperform?
Offering pasta, mac and cheese, pad thai, and more, Noodles & Company (NASDAQ: NDLS) is a casual restaurant chain that serves all manner of noodles from around the world.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Noodles’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines.
2. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Noodles’s demanding reinvestments have drained its resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.6%, meaning it lit $4.59 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Noodles burned through $21.21 million of cash over the last year, and its $289.5 million of debt exceeds the $1.15 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Noodles’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Noodles until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Noodles falls short of our quality standards. Following the recent decline, the stock trades at 1.8× forward EV-to-EBITDA (or $0.94 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of Noodles
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