Buy Chipotle Despite the Metrics
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are a great many things in investing that are cyclical, including attitudes. The buy-and-hold mentality that allowed investors like Warren Buffet to build empires was abandoned in the technology boom of the late 1990’s. Several swings of the pendulum later, the meltdown of the housing market and the overall economy has led to renewed discipline when considering which stocks are worthy of our investment dollars. With this squarely in mind, Chipotle Mexican Grill (NYSE: CMG) is a buy, despite a P/E over 39 and the lack of a dividend.
The Conservative View
Looking at metrics like P/E and operating margin, there is a reasonable argument to be made that Chipotle is still overpriced even after its fall over the past three months. Based on Friday’s 8% jump, the stock is trading at a trailing P/E of 39.7 and a forward P/E of 29.9. To provide some context, McDonald’s (NYSE: MCD), which looks great at current levels, has a trailing P/E of 17.1 and a forward P/E of 15.3. While McDonald’s, Chipotle’s former parent, is a more mature company, the valuation differential is significant.
Another area in which McDonald’s outshines is in its operating margin. The Golden Arches boast an operating margin of 30.6% as compared to Chipotle’s 17.2%. Finally, when McDonald’s dividend yield of 3.1% is figured in, under this type of analysis, Chipotle gets overlooked.
The Growth Story
While the days of buying stocks trading at absurd multiples with romanticized views of the future have passed, this is a case where the growth story warrants owning the stock – both by the numbers and anecdotally. In terms of hard figures, Chipotle had year-over-year quarterly revenue growth of 20.9%; McDonald’s reported 0.2%. Additionally, over the last five years, Chipotle has had average annual sales increases of 22.5% compared to just 5.25% for McDonalds. This is particularly impressive when put into the correct context.
The last five years have seen a significant economic slowdown and reduction in spending by most consumers. During a period of abnormally high unemployment, Chipotle has been able to grow faster than McDonald’s, despite a higher average price point. Enter the anecdotal part of the growth story.
As Americans continue to strive to eat better and make healthier choices, Chipotle has been incredibly successful at differentiating itself as the healthy option for consumers. While McDonald’s would consider its biggest threat to be Subway, this is hardly a reach in an industry that contains Yum! Brands (NYSE: YUM) and Wendy’s (NASDAQ: WEN). Yum!’s KFC and Dave Thomas’s cheeseburgers hardly seem like a threat to either McDonald’s or Chipotle on the health spectrum. Both of the competitor-companies have made strides similar to those taken by McDonald’s to improve the health profile of their food, but this is not a problem faced by Chipotle.
Chipotle has been able to keep its brand pure, which has been a large part of its success. Where competitors are trying to become healthier, Chipotle remains focused on providing the same healthy choices it always has. For the record, before the health police object, I am not advocating burritos as health food, rather I am pointing out that this perception is widely held by quick-casual dinners.
What About Timing?
Last July, when the company missed revenues by quite a large margin, the market punished the stock to the tune of 21.5% in a single day. While commodity prices played a significant role in the then-surfacing concerns, the figures left investors wondering if the blush was off the rose, so to speak. Since then, the stock has traded mostly sideways and shown some life in the last week or so. As can be seen from the chart below, Chipotle had been outperforming the S&P 500 since January.
Based on a combination of the factors above, Chipotle looks attractive at current levels. While typically ignoring valuation is not advisable, the growth trends in both sales and attitudes warrant the risk in this stock. Given that the recommendation is based on the medium and long-term fundamental outlook for the company, the timing for buying the stock looks favorable as well. Within the restaurant space, Chipotle should make a strong addition to your core portfolio.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Chipotle Mexican Grill, McDonald's, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.