Chipotle Ready to Swing Higher on New Stores by 2013
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chipotle (NYSE: CMG) stock has grown over 850% since its public offering in January of 2006 at about $42 per share to over $400 today. I believe the stock is still a good investment because of three reasons I will discuss. First, Chipotle offers three major meats in its menu (beef, chicken, and pork) and it purchases the meat only from farms that raise these animals under strict guidelines. I believe that this gives an advantage over McDonald's (NYSE: MCD) and Yum! Brands' (NYSE: YUM) Taco Bell and KFC franchises as the company's offerings are easily interchangeable. For, example Chipotle does not depend on one major meat like beef (in the case of McDonald's and Taco Bell) or chicken in the case of KFC. Second, sales and profits are growing at one of the fastest rates in the industry and the company's shares provide exposure to this growth. Third, I believe the company's menu, while good, can carry deserts, coffee and healthy juice drinks as well as offer delivery and maybe more veggies and fruits to complement its burritos.
Chipotle menu is simple but well-diversified. Yum! Brands' KFC, for example, reported 10% lower sales in China in 2005 due to the avian flu scare in the fourth quarter of 2005. The company went as far as to prepare an avian flu fear plan. Similarly, sales of Taco Bell and McDonald's constantly drop on news of mad cow disease cases around the world. Ultimately shareholders carry the burden of these negative developments. In addition to this, there are problems with volatility in the price of beef and pork, inhumane treatment of animals that are raised for McDonald's, Yum! Brands, and other chains as well as groceries. Chipotle offers three types of meat (chicken, beef and pork), which are easily interchangeable. For example, if beef prices turn low it can bring in more customers by offering beef discounts. And if there is an outbreak of mad cow disease, people know to order a chicken or pork burrito.
Another of Chipotle's major advantage is that it buys meats from farms that meet certain strict criteria and is also available at reasonable prices. The pork sold at Chipotle is from 100% naturally raised pigs, as much as possible of the cattle is also naturally raised, and chicken is raised without the use of arsenic and with little antibiotics as possible. Recently, Burger King announced that it is committed to enhance animal welfare. Since Burger King is going public again later this year I wonder if this is a publicity stint to raise its image before the IPO or a real concern about animals.
I think Chipotle's efforts to offer food with “integrity” is evident in its high valuation. In the first quarter of 2012 it reported diluted earnings per share of $1.97. This was a growth of 34.9% compared to the first quarter of 2011. For comparison, McDonald's earnings per share for the same period grew by 8% and Yum! Brands' 21%. Even Starbucks, which is still considered a high growth stock, grew its earnings per share by only 18%.
I believe that investors should expect a lot more growth from Chipotle. The company plans to open about 160 restaurants just for the remainder of the calendar year. In addition, the company has only a few restaurants overseas and this should provide additional growth. Analysts estimate that Chipotle will earn about $9 per share in 2012 and $11 in 2013. I estimate that these targets will be exceeded by Chipotle and it will earn $10 per share in 2012, $13 in 2013 and $20 by 2015.
Growth should come not only from international expansion but also from adding more items to its simple menu. I think Chipotle should offer more vegetables on a stand-alone basis. Chipotle menu is based on offering a few but very good items similar to other small fast-food chains (Five Guys and Shake Shack, for example). However, offering more side choices should not reduce the simplicity of its main burrito offerings but complement it. Also, it will allow people who would like to just enjoy a drink and a side to go to Chipotle. In addition, I think it is just a matter of time before Chipotle starts offering healthier soft-drinks as consumers are increasingly shying away from soda. This is evident by Starbucks' recent purchase of Evolution Fresh, a seller of freshly made juices and its expansion into healthy food offerings. Chipotle should also begin to offer a breakfast menu and healthy deserts such as fruit salads and frozen yogurt.
There are many tailwinds that will provide growth for Chipotle stock in the coming quarters and years. In addition, the company will grow organically by offering more menu items and by expanding overseas. Even if its menu stays the same the company is very well accepted by a variety of consumers and it should continue to dominate the burrito market. I expect its earnings to outperform as the economy continues to strengthen and due to availability of more top quality retail space.
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.