Noodles & Co (NDLS) Soars…But Is it a Buy?

Panera may trade at a relatively high price to earnings multiple (30), but its PEG ratio, which accounts for earnings growth, is just a tad over 1. The company is growing, so its valuation gets more reasonable every day. Panera’s EPS is expected to grow $1 per share this year, and nearly $2 per share next year. Earnings at Panera have grown 26.5% over the past five years, annually. This rate of growth has only been matched by, you guessed it, Chipotle; the burrito maker has grown in double digits and is projecting growth of 25% and 30%, respectively, for the next two years.

I like Panera Bread Co (NASDAQ:PNRA) and Chipotle Mexican Grill, Inc. (NYSE:CMG) because l believe they have a rare opportunity to earn ridiculous margins compared to other restaurants. The reason is that these companies don’t have large expenses such as high-priced chef’s salaries, heavy duty ovens and gas bills, or waiters and waitresses. Yet, despite their relatively low cost structures, they get away with charging much higher prices than typical “fast food” companies, like Burger King. This is the biggest reason that Panera has earned a 15% return on capital and that Chipotle has returned 25% on capital. These returns will give these businesses more money to reinvest into new locations and, in Chipotle’s case with ShopHouse, new restaurant concepts. Eventually, the high returns on capital should lead to continued stock gains.

Stick to what you know

I like Noodles & Co (NASDAQ:NDLS). I like their food, I like their business model, I even think the stock could (eventually) make sense. The problem with the stock comes down to timing. In nearly every case, buying an IPO after a big opening day has been a mistake. So wait for Noodles & Company, keep it on your radar for now, and buy some shares of Panera and Chipotle instead.

The article Noodles & Company Soars…But Is it a Buy? originally appeared on Fool.com and is written by Adem Tahiri.

Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA). The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.