Buy Now or Regret Forever

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Chipotle Mexican Grill (NYSE: CMG) has been a popular growth story, riding on the increasing popularity of Mexican Food. The restaurant chain has nearly 1,230 restaurants, operating mainly in the US. Unlike McDonalds, which has over 33,000 restaurants around the globe, Chipotle is beginning to expand internationally.

The fact that since Chipotle has not yet opened up in China and India, initiating operations in the world’s most populated countries offers significant growth potential for the restaurateur. Yum Brands (NYSE: YUM), a quick service restaurant chain which has over 37,000 stores in 120 countries recently reported solid financial results backed by strong Chinese sales. Its revenues were up 9% and EPS stood at $0.99 beating the street’s estimates. However its same store sales (SSS) in China dipped by 4% following which the stock took a beating. Also the SSS of McDonald's (NYSE: MCD) fell more than the street’s estimates, due to its presence in financially troubled countries.

On the back of growing consumer spending and increasing popularity of Mexican food, Chipotle reported a 18.4% jump in revenues. Quarterly same store sales rose by 8% and the net income surged 19.6% YoY. Restaurant level margins also increased by 0.7% and in the first 9 months of 2012, Chipotle opened 123 new restaurants. The company expects to open between 155 and 165 new restaurants in 2012 along with 165 to 180 stores in 2013. This accounts to 10%+ increase in restaurants YoY.

CMG had announced a $100 million share buyback plan on October 18, out of which $40 million worth of shares had been repurchased in October itself. On the 26th, the management approved another $100 million buyback plan which is to be carried out in the first quarter of 2013. Over the past 4 years, Chipotle has repurchased $388 million worth of shares and a sudden spike in repurchases, only highlights the strong confidence of the board in the company’s future.

Attached below are some key financial metrics relevant to the discussion.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Current Ratio</p> </td> <td> <p>Debt/Equity</p> </td> </tr> <tr> <td> <p>Chipotle Mexican Grill</p> </td> <td> <p>4.12x</p> </td> <td> <p>0.00x</p> </td> </tr> <tr> <td> <p>Yum Brands</p> </td> <td> <p>1.01x</p> </td> <td> <p>1.37x</p> </td> </tr> <tr> <td> <p>McDonald's</p> </td> <td> <p>1.01x</p> </td> <td> <p>0.92x</p> </td> </tr> </tbody> </table>

(Source: Finviz)

Chipotle operates with only $3.6 million in debt and retains 100% of its earnings. The company ended the quarter $1,307.6 million in shareholder’s equity and $421.1 million in cash and cash equivalents. Also Chipotle has a high liquidity ratio, and I don’t think Chipotle will have any speed bumps in its expansion plans.


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CMG data by YCharts

(Over a period of 5 years, Chipotle has outperformed its peers in terms of stock returns.)

Though Chipotle Mexican Grill missed the street’s estimates, I believe that it was due to overly optimistic expectations. There’s no denying that Chipotle reported solid quarterly financials, by ramping up its margins and beating the inflationary pressures under challenging macroeconomic conditions. The company has aggressive expansion plans, and with very little debt compared to its cash flows and cash reserves, Chipotle seems to be well on track.

Analysts estimate the company’s EPS growth over the next 5 years, to be 21.5% and in my opinion investors should be looking to enter Chipotle at the current dip in its price. Also, investing in Chipotle now is a good idea because the US economy is showing signs of recovery, with the unemployment rate dipping and consumer spending on the rise.


PiyushArora 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 and McDonald's. 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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