Noodles & Company (NASDAQ: NDLS), a consumer discretionary company with a market capitalization of $506 million, saw its share price increase by 66.6% over the prior three months. As a small-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. Is there still an opportunity here to buy? Let’s examine Noodles & Company’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.
Is Noodles & Company Still Cheap?
According to my valuation models, the stock is currently overvalued by approximately -23.0%, trading at $12.35 compared to its intrinsic value of $9.52. Not the best news for investors looking to buy!
|Analysis||Model Fair Value||Upside (Downside)|
|10-yr DCF Revenue Exit||$13.48||9.1%|
|5-yr DCF Revenue Exit||$16.80||36.0%|
|10-yr DCF EBITDA Exit||$11.49||-6.9%|
|5-yr DCF EBITDA Exit||$14.16||14.6%|
|Peer EBITDA Multiples||$8.09||-34.5%|
|10-yr DCF Growth Exit||$3.03||-75.4%|
|5-yr DCF Growth Exit||$2.90||-76.5%|
|Earnings Power Value||$6.18||-49.9%|
Click on any of the analyses above to view the latest model with real-time data.
In addition to this, it seems like Noodles & Company’s share price is quite stable, which could mean two things. One, it may take the share price a while to fall back down to an attractive buying range, and two, there may be less chances to buy low in the future once it reaches that value. This is because the stock is less volatile than the wider market given its low beta of -0.39.
What Does The Future Of Noodles & Company Look Like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.
source: finbox.io data explorer
Noodles & Company’s revenue growth is expected to average 1.4% over the next five fiscal years indicating that the core business could be in real trouble. In fact, this could imply that its products or services are losing demand and/or becoming irrelevant.
How This Impacts You
Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:
“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”
While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.
Unfortunately for shareholders, Noodles & Company’s future growth is relatively low and it appears the stock is now trading above its intrinsic value. Therefore, it may be a good time to begin reducing your position in the company. However, there are also other factors to consider that could explain the current overvaluation.
But before making an investment decision, I recommend you continue to research Noodles & Company to get a more comprehensive view of the company by looking at:
Risk Metrics: what is Noodles & Company’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.
Valuation Metrics: what is Noodles & Company’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.
Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Noodles & Company’s return on equity here.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.