Noodles & Company Stock Still Pricey After Selloff (NDLS)

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Noodles & Company (NDLS) stock is plummeting on Friday, after the fast-casual noodle chain posted disappointing second-quarter results.

noodles-and-company-ndls-stock-185After a 24% selloff in 2014, NDLS stock is off another 52% in 2015 alone. The fact that the Noodles & Company IPO back in 2013 is the highlight of the stock’s short history isn’t too reassuring for current investors. Shares jumped 104% on their first day, and they’ve mostly been falling ever since.

The company’s Q2 numbers weren’t very encouraging, either. Let’s take a gander at what’s causing shares to take a hit today, and why they look like a bad investment … even after a 17% stumble.

“Fast-Casual” Doesn’t Equal “Strong Buy”

The fast-casual dining craze that’s taken the restaurant industry by storm in recent years has also caught the attention of Wall Street. Chipotle (CMG) is the golden-boy of the group, and its shares are on a 5-year, 400% tear. Panera (PNRA) stock has also walloped the market over that period, with its 5-year return of 157% trumping the S&P’s by nearly 70 percentage points.

But NDLS stock, like El Pollo Loco (LOCO) and Potbelly (PBPB) before it, has fallen victim to the unfortunate phenomenon of being priced to perfection by optimistic investors.

Sometimes that optimism can even turn delusional, as it did with Shake Shack (SHAK) stock back in May, when shares approached the $100 range, nearly five times its price in late January when Shake Shack went public at $21 per share. At that time, the market was valuing each restaurant at nearly $50 million per location.

With few exceptions, Wall Street has a disturbing tendency to overvalue stocks like NDLS, setting them up for failure when they inevitably can’t live up to expectations.

That was the story of NDLS stock today after second-quarter results, which were woefully average.

The Numbers

Noodles was hit by a triple-whammy today as the company missed on earnings and revenue, while also lowering guidance.

NDLS earnings of 10 cents per share were 2 cents lower than the consensus, while second-quarter revenue of $115.2 million also whiffed on the $118 million Wall Street was calling for.

Management lowered full-year EPS estimates from 38 cents to a range of 26 cents to 32 cents, well below analysts’ consensus 37-cent estimate.

But NDLS stock didn’t simply fall due to this trifecta of pain; the reason behind the ominous triple-whammy was the worst news of all. Same-store sales (SSS) at the company’s 411 company-owned restaurants fell 0.1%, while SSS at the 61 franchised locations actually fell 0.5%, making for flat system-wide SSS in the quarter.

Those numbers are horrendous. Same-store sales is the holiest of metrics in the restaurant industry; lackluster SSS is the crux of the reason McDonald’s (MCD) stock has languished in recent years. Moreover, it’s not impossible for fast-casual companies to have good or even great SSS — look at Chipotle, which saw a same-store sales increase of 4.3% in the most recent quarter.

Trading at 22 times 2016 earnings estimates — which may or may not be revised lower after Thursday’s poor showing — NDLS stock is no steal. Investors who don’t want a sour taste in their mouth should stay far away from it.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/noodles-company-stock-still-pricey-after-selloff-ndls/.

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