The Real Value in Broadened Horizons
Patrick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market has paved a beaten path for a countless number of companies this year due to a rash of dismal economic outlooks, but while many have relentlessly worked to weather the storm, a couple have become glimmers of hope. Market darlings Chipotle Mexican Grill (NYSE: CMG) and Starbucks (NASDAQ: SBUX) have provided investors with year-long hospitality of wallet warming news during these uncomfortable economic times. Their barrage of positive outlooks has lead to increases of over 20% in shares of both companies on the year and no one appears to be shying away from either of the two just yet. This certainly comes as great news for long time shareholders of the companies, but for those just now looking to join in, it’ll be useful to make sure these havens haven’t already reached full capacity.
Let’s first take a look at burrito extraordinaire, Chipotle Mexican Grill. Currently operating about 1,500 restaurants with only 4 outlying the US, their share price has been bloated in part by announcements of their expansion into international markets. Although they are no longer under the wing of McDonald’s, they do obtain similar distribution networks to the fast food conglomerate that might be helpful in replicating its global success. As shown when multiplying their restaurants 100 fold under McDonald’s supervision in their infantile stages, it does help to follow the methodology of someone who’s been there, done that.
Golden Arches or not, news of expansion tends to rub investors the right way, as it should. It typically signifies a future of healthy revenue growth, which is essentially the motive of any investment, but with each new restaurant expensing $800,000 a pop and an estimated two years of operation until sales normalize and new customer bases are formed, they could be breaking even for a little while on the 160 planned to go up in 2012. They might not be able to cook up expansion profits quite as fast as an outstanding burrito. The company does have plenty of room to grow into the future, but those aspirations seem to have become exhausted as it steadily trades at a P/E above 50 and PEG above 2.
Trying to find a happy place between Chipotle’s stock price, seemingly high valuations and love for the company will probably be leaving many investors thoroughly drained. Luckily with an estimated opening of 1,000 new stores globally in 2012 themselves, Starbucks should only be an arm’s reach away with a variety of caffeinated beverages to rejuvenate their spirits. Expansion was also a catalyst for Starbucks’ stock, but their headlines have been flooded with a multitude of optimism this year. Seemingly forgotten now, the Verismo announcement in early March that nabbed some of Green Mountain’s (NASDAQ: GMCR) investors sparked more bullish interest when it declared that they would be taking their brewing out of wifi range later this year and into the homes of specialty coffee fanatics. However, those that jumped ship on the ousted Green Mountain should still note that their bond with the coffee purveyor was not afflicted. Starbucks reported a Q2 57% increase in their “Channel Development Segment,” which is largely comprised of custom Starbucks and Tazo tea K-cups.
It hasn’t all been speculation about the future, though. Starbucks did open its first Evolution Fresh store in March and then emptied the tip jar to buy La Boulange Bakery outright earlier this month. The bakery is expected to take a bite out of Panera's (NASDAQ: PNRA) bread. Panera's Starbucks-like ambiance, with tastier food, attracted an 18% increase in revenues last quarter.
Led by strong management, great products and the business integrity to make it all sizzle-- these companies have impressively surmounted themselves in a market surrounded with unnerving uncertainty. They’ve dazzled the market thus far in 2012 with strong expansion plans intertwined with strategic diversifications, but as both trade only about 13% off 52-week highs while sporting heftier metrics than typically favored, they’ve probably closed the opportunity of an attractive investment for the time being--until they have the time to start swinging some more hammers and delivering more of the expected results. We’re always hungry for upstanding companies, but just as with those hearty burritos or venti lattes, it’s important that your eyes remain smaller than your stomach or you’ll be digesting their contents for longer than expected.
Patrock19 owns shares in GMCR. The Motley Fool owns shares of Chipotle Mexican Grill, Panera Bread, and Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, Green Mountain Coffee Roasters, Panera Bread, and Starbucks. 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.