Chipotle and Panera vs. Fast Food

Joel 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 been known for its incredible growth since the company went public in 2008. Last year, the stock peaked at above $400 before missing estimates and crashing down to $233. As of now, the shares are marching back up, currently at $386.

Chipotle has increased revenue by over 20% in each of the last three years and is trading at 41 times earnings. Usually it’s not good to be trading at such a high multiple, but with constant profit margins of around 27% and more than 20% year-over-year revenue growth, Chipotle is allowed to be valued so highly. 

An equally solid investment

Panera Bread (NASDAQ: PNRA) has had solid growth, and continues to show it. Trading at 31 times earnings, Panera is anticipated to continue growing as fast as it has been. Year-over-year revenue growth of 14% shows that Panera actually is growing as fast as expected, however not as fast as Chipotle. It keeps the "mom and pops" attitude in its bakeries, and analysts see the company as growing to as big as Starbucks in only a few years. Although analysts have Panera's revenue slowing down in Q3, I'd still keep an eye on the company. Its performance has been impressive with 18% growth this year in a sector with -28% growth. 

Both of these investments can be compared to Jack in the Box (NASDAQ: JACK). Jack in the Box is trading at a similar P/E of 27. It recently reported  a decrease in year-over-year net revenue of $11 million; revenue fell from $366 million to $355 million. Although franchise earnings increased from last year, the main contributor to the net revenue drop was a lack of sales. Sales decreased by more than $13 million from last year. This led to an earnings per share of $1.50 for Jack in the Box compared to Chipotle's $9.23 and Panera's $6.13. 

Jack In The Box is struggling to continue growing in a market where greasy fast food is becoming increasingly frowned upon. It has branched out with its Qdoba restaurant that serves somewhat healthier Mexican food. Some say this is a copy cat of Chipotle, being very similar in restaurant style and food selection.

Jack in the Box recently introduced four new menu items: the Big Stack, Big Waffle Stack, Loaded Chili Cheese Wedges, and Iced Coffee. None of these sound like Jack in the Box is making an effort to move away from the greasy fast food that's known to be so bad for consumers' health. 

Chipotle and Panera have moved away from the greasy form of fast food and into healthier food that can still be served quickly, proving that healthy food can be still be fast. They are trading only slightly higher P/E-wise compared to a struggling Jack in the Box. This shows that compared to competitors, Panera and Chipotle have potential to rise quickly if they can continue outperforming their sector. 

The revolutionized restaurant experience

The growth in Chipotle comes from the amount of restaurants it opens. Chipotle has consistently opened almost 200 new restaurants every year, now having over 1,400 locations. This is the main reason it can report the kind of great revenue growth that it historically has. In 2011, revenue growth was 24%, and in 2012 it was 20%. These are great numbers, and Chipotle’s share price is on the rebound, but has it gone far enough?   

Analysts expect 16% revenue growth this year. I think Chipotle can meet its previous yearly revenue growth of 20%, if not beat it. Revenue stems directly from the number of restaurants, and with constant profit margins of 27% over the last three years, it’s obvious Chipotle has things pretty locked up with farmers; the only variable is the number of restaurants. This is why it will beat expectations. 

Anybody down for Asian?

Chipotle is smart, and realizes that it may have maxed out locations and can’t continue to expand by 200 restaurants per year without cannibalizing itself. This is where ShopHouse comes in. ShopHouse is a Southeast Asian kitchen restaurant developed by Chipotle. Mexican and Asian foods are on completely opposite ends of the spectrum, and this allows the company to open ShopHouse restaurants in literally every single town in which Chipotle is located and avoid cannibalizing the company.

With name recognition and a style of restaurant that people like, Chipotle and ShopHouse are just beginning their climb back to the top. Profit margins might decrease slightly while the company opens new ShopHouse locations and word of mouth spreads, but revenue growth should highly exceed 17%.

Bring out the numbers

Based on the numbers, if Chipotle continues to maintain a profit margin of 27%, a P/E of 39, and has revenue growth of  at least 18%, the share price next year should be $545. Buy Chipotle while it’s cheap, the numbers don’t lie and this year’s earnings report will leave investors sitting pretty.

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Joel Wasserman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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!

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