Growth Concepts Get A Premium

Restaurant Finance Monitor: Growth Concepts Get A Premium

BY JONATHAN MAZE      July 2013

When Noodles & Company doubled in price on its first day of trading, some commentators called the performance “surprising.” But anybody who follows restaurant stocks knows there was nothing surprising about it: perceived growth chains are so rare on the equity markets that those who do go public get a big premium.

For evidence, simply look at three of the more recent restaurant IPOs: Noodles, Chuy’s and Dunkin’ Brands. Those three concepts each went public in the past couple of years. They are considered growth chains. And they have three of the four highest valuations among publicly traded restaurants, at least based on their enterprise value/EBITDA multiple.

Chuy’s went public a year ago and has tripled in price since then. Based on EV/EBITDA it has the highest valuation among restaurant stocks at 27.89, at least based on its price yesterday.

Noodles’ early performance has been stunning. It more than doubled on its first day and then kept going up, thanks in large part to a hearty endorsement by CNBC’s Jim Cramer. The result: even after the stock fell some today it is nevertheless up 150 percent. Entering the day, its EV/EBITDA multiple was 27.85.

No other restaurant chain is even close. Chipotle’s EV/EBITDA multiple is 19.01. For Dunkin, it’s 19.89. The third highest valuation among restaurants, in fact, belongs to Krispy Kreme, at 20.77. (Fun fact: If you invested $1,000 in Krispy Kreme on New Year’s Day, 2009, you’d have more than $11,500 right now.)

By contrast, restaurants on Wall Street have multiples of about 13.2.

I understand that using EV/EBITDA is one of a number of valuation metrics, and EBITDA itself is terribly imperfect, but it’s a good way to measure restaurants given their different capital requirements and business strategies. In any event, the multiple demonstrates that investors have been flocking to those companies with growth.

In general, QSRs have higher multiples than casual dining restaurants. So McDonald’s, which has a multiple of 11.2, is trading at a higher level than its casual dining counterpart, Darden (8.8). And concepts with sales momentum like Popeyes (15.8) and Domino’s (15.48) also have higher multiples. But nothing beats growth to get investors interested in a stock.