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Investment Club team pitches Eddy Street newcomer Noodles & Co.

| Thursday, February 17, 2022

As a portion of the University’s endowment, Notre Dame’s investment club manages a $1.2 million portfolio of long equity positions. The investment club board invests in long equity positions with the intent to sell securities when they reach a higher target price.

While pitching Noodles & Company (NDLS) to the Notre Dame Investment Club on Tuesday, sophomores Raleigh Bulleit, Jason Leyden, Ibb Mayr and Jack Taylor unveiled some primary research on their chosen stock.

“We surveyed Notre Dame students and asked them to rank the restaurants on Eddy Street on a 10-point Likert Scale,” Bulleit said, describing his team’s “boots-on-the-ground” approach to equity research.

The team calculated a Noodles & Co. score of 6.61 on the scale, which outpaced the scores of both Blaze Pizza and Jimmy Johns and fell short of Chipotle by only one point. The team noted, however, that the performance of NDLS on Wall Street does not match its popularity on Eddy Street.

Since its Initial Public Offering (IPO) on June 27, 2013, NDLS has fallen about 49% from $18 to a close of $9.20 Tuesday. For comparison, the S&P 500 index has risen 173% over the same period.

The initial high valuation was due to a rapid company-wide expansion, but this expansion was short-lived because most of these new restaurants were underperforming the initial chains, Leyden said, explaining the drop in valuation.

Noodles & Company has a key advantage among younger demographics, with a 7% advantage over competitors in the 25-34 age group, since many millennial parents with children frequent this fast-casual eatery, the team added.

Although the pandemic may have contributed to a depressed stock price, NDLS was able to become a more efficient firm with more loyal customers over the past two years, the team said. Through the opening of “Ghost Kitchens” and renovations to create more drive-thru locations, Noodles & Company is catering to its busy millennial target audience while cutting costs, they added.

Another upside, Noodles and Company also has a thriving rewards program that boasts upwards of 3.9 million members and incentivizes delivery.

“Chipotle has roughly a million rewards members and they have six times as many stores,” Mayr said.

If NDLS can leverage its larger reward program to create more recurring customers, the team said its growth narrative is in play. This growth thesis is magnified by a two-pronged management approach in the form of unit expansion and franchising initiatives.

Management is “planning to grow units at 7% in 2022 and stabilize growth at 10% until there are 1,500 units total in approximately 2034,” Taylor said.

This goal would be triple the number of current locations for a management team that has failed to deliver during expansionary phases in the past. Noodles & Company is also trying to increase new openings and franchise locations by creating more certifications, support teams and real estate development contracts. The final segment of the pitch included a valuation of the company using several key metrics.

The team compared Noodles & Company to similar companies such as Del Taco, El Pollo Loco and Portillo’s, and weighted this portion of the valuation at 40%. The team calculated the remaining 60% of the valuation weight with various discounted cash flow models that accounted for various revenue growth rates that were based on assumptions for how many units will likely be created through 2031.

Altogether, the company was valued at $13 per share, implying a 40% upside from the close Tuesday.

The Investment Club board said that, although the assumptions within the base case were conservative across the board and could be met with relative ease, there were still several unmet concerns within the company that prevented them from initiating a position.

The board cited concern over Noodles & Company’s low margins relative to peers, the high threat of substitution via home cooking and a poor track record among executives regarding previous failed growth plans.

The Investment Club did not buy into the thesis, deciding not to add Noodles & Company to the portfolio. Investors who do want to add Noodles & Company to their portfolio can buy a share at the cost of one regular buttered noodles dish and a side of oven-roasted meatballs.

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