Over the last six months, Noodles’s shares have sunk to $0.89, producing a disappointing 7.7% loss - a stark contrast to the S&P 500’s 4.1% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Noodles, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Noodles Will Underperform?
Despite the more favorable entry price, we're swiping left on Noodles for now. Here are three reasons why there are better opportunities than NDLS and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales at restaurants open for at least a year. This is a key performance indicator because it measures organic growth.
Noodles’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% 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.
While Noodles’s free cash flow broke even this quarter, the broader story hasn’t been so clean. 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 4.2%, meaning it lit $4.17 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 $18.45 million of cash over the last year, and its $282.2 million of debt exceeds the $1.40 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
We see the value of companies helping consumers, but in the case of Noodles, we’re out. After the recent drawdown, the stock trades at 1.4× forward EV-to-EBITDA (or $0.89 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
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