This Mexican Grill Is A Good Buy Today
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chipotle Mexican Grill (NYSE: CMG) has recently been upgraded from a neutral rating to an outperform rating by the analysts at Wedbush. As a result of the news Chipotle Mexican Grill opened up on Monday at a higher price of $341.91. Chipotle operates fresh Mexican food restaurants serving burritos, tacos, burrito bowls, and salads. Chipotle Mexican Grill operates 1,410 restaurants.
Food with integrity
Chipotle Mexican Grill has always focused on quality and hygiene. It has incorporated in its vision the unique concept of “Food with Integrity”. Chipotle offers a value proposition of better food produced using organic ingredients. The use of the organic ingredients in producing food products has become the USP for Chipotle. Chipotle claims to serve more naturally raised meat than any other restaurant chain. Chipotle focuses on using high-quality raw ingredients, classic cooking methods and distinctive interior design in order to attract and retain customers.
As a strategy to involve people in its “Food with Integrity” concept, Chipotle has announced its plan to host cultivate festivals in San Francisco, Denver, and Chicago. The festivals are a one day event and include cooking demonstrations by celebrity chefs, live music, a special Chipotle festival menu, etc. emphasizing fresh food made with sustainable and organic ingredients. The whole idea behind these events is to educate people about how food can be raised responsibly.
Chipotle Mexican Grill operates 1,410 restaurants out of which 1,399 are located throughout the United States, five are located in Canada, five are located in London and one in Paris. The company has grown substantially over the past five years. Chipotle expects to open between 165 and 180 additional restaurants in 2013. The future growth of Chipotle will be driven by its expansion plans.
Changing Consumer Preferences
In 2013, with the changing consumer preferences traditional fast food companies like McDonald’s and Yum Brands are expecting a tough year, while companies like Chipotle are expecting growth. The biggest reason is the unique positioning of Chipotle. Chipotle has positioned itself in the sweet spot between traditional fast food and waiter service. The ambiance of Chipotle's fast-casual restaurants, and its emphasis on fresh ingredients has been successful in attracting and retaining people who do not mind paying about twice as much to eat at the Chipotle’s restaurants than at an eatery like McDonald's or Taco Bell.
The year 2012 proved to be a good year for Chipotle as it posted positive financials. In 2012, revenue increased to $2.73 billion with an increase of 20% over the previous year 2011. Net income for Chipotle increased to $278 million, marking an increase of 29% over the previous year. The restaurant sales increased 7.1% in 2012 and the diluted earnings per share was $8.75, an increase of 29.4% over the previous year. It opened 183 new restaurants in 2012. Restaurant level operating margin increased 110 basis points over 2011 to 27.1%.
Chipotle is expected to announce its first quarter 2013 results on 18 April, 2013 and the results are expected to be positive.
Chipotle’s stock analysis
Chipotle is enjoying a bullish trend since touching a low of $236 in October 2012. Currently the stock is trading at the level of $344. The positive outlook is due to the great financial performance shown by Chipotle in the previous quarter. Chipotle enjoys a market capital of $10.73 billion. The quarterly revenue growth of 0.17 year on year for Chipotle is better than the industry’s growth of 0.09. The operating margin and gross margin for Chipotle exceeds the industry’s margin.
Jack In The Box, with its subsidiary Qdoba Restaurant, operates restaurants with the name of Qdoba Mexican Grill in the United States. Qdoba operates with about 600 fast casual restaurants throughout the United States. The company trades at $35, with a market cap of about $1.5 billion.
Comparatively larger, Florida based Darden Restaurants trades at $50 and has a market capitalization of about $7 billion. It operates full service restaurants in the United States and Canada. It operates restaurants under different brand names like Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, and Wildfish Seafood Grille. In 2012, it owned and operated approximately 2,000 restaurants.
Comparison with Competitors
New Restaurants opened: During the year 2012, Chipotle opened 180 new Mexican grill restaurants in the US whereas Qdoba (Jack in the Box) opened 78 new restaurants (46 Company owned and 32 franchise owned) and Taco Bell (Yum Brands) opened around 25 units in the United States.
Net Income increase: For Yum! Brands (NYSE: YUM), net income increased 21% from $1.319 billion in 2011 to $1.597 billion in 2012. Chipotle’s net income increased 19.7% in 2012 whereas for Jack in the Box there is an increase of 13.6% in net income in 2012.
As seen from the table, Chipotle has better margins than Jack in the Box and its margins are comparable with Yum Brands.
Chipotle is the market leader in the Mexican fast casual restaurant industry with over $2 billion in sales which accounts for nearly 15% of the industry. Chipotle is one of the fastest growing public restaurants with an average growth of 14% over the past five years. Chipotle’s future growth outlook is positive as it is expanding operations by opening around 165 to 180 restaurants in 2013. Chipotle is also planning to roll out a new catering business in 2013. Chipotle’s ability to produce better food and its efficient operations has led to its growth. Chipotle is a buy for the long term. Recently, UBS has also raised the rating of Chipotle Mexican Grill to buy from neutral.
Shas Dey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!