Who Busted the Pinata at Chipotle?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Someone sure busted the pinata at Chipotle Mexican Grill (NYSE: CMG) and took away all the candy. Chipotle has tanked over 10% since its high of $442.40 in early April. And it wasn't just the analyst at ITG Investment Research who predicts same store sales slowing, the stock price was already dropping before that. Not that it hasn't had one of the most impressive stock runs of the decade from the mid-40s in 2007 to this spring's high, no one can say it isn't a beautiful chart.
And the food is good, it is healthy and often locally sourced, the efficiency of each store's operation is one of the best in the 'fast casual' segment and it clearly has been a winning momentum stock. Until it's not.
Too Many Cooks in the Kitchen
What has worried me for some time is the lack of a moat. The Mexican food restaurant sector is saturated. Not necessarily with grease but there are so many privately owned cantinas, taquerias, food trucks, privately held chains and two publicly owned competitors all vying for the newly acquired American lust for Mexican food.
It's a long standing cliche that when immigrants come to America and want to start a business they start a restaurant of their own ethnic cuisine. Cliches are only trite because they are boringly true. Read "The Fortune Cookie Chronicles" by Jennifer 8 Lee (yes, that's her real name), which entertainingly and informatively explains the inner workings of the Chinese food business as she explains the cottage industry of importing Chinese citizens to America to work in said restaurants. I promise you will never look at a Chinese buffet the same way again.
That said, another Fool article explains that its the growth of stores that is the saving grace of Chipotle. In one two block area where I live there is a Baja Fresh, a Chipotle and a Taco Bell. There used to be a California Tortilla also (an East Coast chain of very similar and tasty offerings). They had the sense to move into a less competitive area.
And now they have their ShopHouse concept, Asian fusion food made with Chipotle-style efficiency and freshness. I like the concept except for the fact that there are over 40,000 Chinese restaurants in the USA. "There are more Chinese restaurants than McDonald's, Burger King and Kentucky Fried Chicken combined," according to Lee's blog www.fortunecookiechronicles.com. Not to mention all the Thai, Indian, Korean and Vietnamese restaurants that crowd the Dupont Circle area of D.C. where the first ShopHouse opened.
On technicals alone, Chipotle is worrisome with a 51 P/E and no yield; it's not a cheap stock. The average price target is $446, only a few dollars above its all-time high. The foray into the ShopHouse restaurants alone would make me look more than twice. And now competing with Chipotle head to head there's Qdoba Mexican Grill, a line of Mexican theme franchises owned by Jack in the Box (NASDAQ: JACK).
You Don't Know JACK
Jack in the Box has had a very decent run too. Since mid-May it has moved from $22.30 to its 52-week high of $27.25. Primarily known as a burger chain, since 2003 it's been growing its own Mexican dining concept, like McDonald's did with Chipotle, and has already grown to the third largest Mexican restaurant chain in America.
The Qdoba Mexican Grills are really catching on and new restaurants like the latest to open in Staten Island have people lined up around the block. Their line is eerily similar to Chipotle's with its emphasis on freshness and healthy lifestyle choices but imitation may be the sincerest form of profitable flattery. So much so that Jack In the Box plans to have 2000 open by 2015.
The stock was upgraded by Bank of America on June 22 and has a price target of $32 based on declining commodity costs and better showings at the Jack in the Box restaurants. The shares have a 16.81 P/E and no yield. There are 2,262 Jack in the Boxes in the US and 605 Qdobas, both of which the majority are owned by franchisees. These franchisees provide a reliable source of royalties and rental income.
Does the Bell Toll for Thee?
Lastly, there's Taco Bell owned by YUM! Brands Inc (NYSE: YUM), another competitor in the Mexican restaurant section. While Taco Bell has been debuting its more upscale, healthier Cantina Bell menu, it still offers the very inexpensive fast food style tacos, burritos, etc. Yum of course, also owns Kentucky Fried Chicken and Pizza Hut.
Yum, the stock, was just hit after hours Thursday, hitting the $62.00 level after having soared to $74.44 in mid-May, caused by a sympathy decline with Nike reporting slowing in China. As most investors are aware the Kentucky Fried Chicken outlets in China have been growing and have been the most profitable segment (40% of profits) of the Yum trinity. They are so popular there that it's considered a prime venue for weddings.
Despite this popularity, if Chinese growth is slowing things could get uglier for Yum with US sales already continuing to decline. And surprisingly, Yum has a higher P/E 0f 20.21, which is higher than Jack in the Box but it's the only one of these three with a yield (1.70%).
So, where to go if you have a craving for Mexican? I'd have to say not Chipotle, at least not at this level, and Yum will swoon on any bad news out of China. Jack is the man to go to for that burrito and burger mojo that you crave for your portfolio.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services recommend Chipotle Mexican Grill, Jack in the Box, 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.