Should Investors Be Salivating Over This Restaurant Stock?
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As an investor, I suffer from an insatiable appetite for finding responsible, growing companies with sustainable competitive advantages in their industries. It's a problem, really; I have trouble going anywhere without pausing to break down the investment potential of any given situation.
I'm also a relatively big guy with propensity for gravitating toward cold beer and great food. You can only imagine my excitement, then, the first time I had the chance to walk through the doors of a Chipotle Mexican Grill (NYSE: CMG) a little over two years ago.
As I walked inside, I was struck by the clean, modern interior and simplistic, easy-to-read menu which prominently displayed Chipotle's now-infamous slogan, "Food With Integrity" -- a reference to the company's stubborn insistence on finding "the very best sustainably raised food possible with an eye to great taste, great nutrition and great value."
As my mouth began to water, I couldn't help but remember this was the company behind the growth stock about which I had already heard so much. Even still, from an investment perspective, I couldn't help being skittish as shares of CMG were on a tear at the time, trading just under $260 per share and up nearly 400% over the previous two years. A few weeks earlier, I had even closed my long-standing "Outperform" CAPScall for the company as its valuation became a concern.
Naturally, Chipotle proceeded to rally 70% over the next year and a half, setting a new 52-week-high this April. However, after its two most recent quarterly earnings reports failed to meet seemingly-impossible expectations, shares of CMG quickly plummeted to mark a fresh 52-week-low just two months ago. While the stock has bounced 20% since then, it still sits more than 35% below April's high mark.
Should investors be drooling over shares of Chipotle at current levels, then? To find out, let's take a deeper look at the company's key metrics next to two of its peers:
At first glance, Chipotle appears expensive, trading for 33.2 times trailing earnings and around 27.5 times next year's estimates. When measured against analysts' long-term annual growth estimates of 22%, however, CMG has a PEG ratio of 1.50 -- a similar premium on growth to YUM! Brands and Panera.
With more than $421 million in cash and no debt, Chipotle has also wisely steered clear of using leverage to finance its expansion plans. While CMG doesn't pay a dividend, it boasts a strong ROIC of 20.9%, showcasing an exceptional ability for creating shareholder value by reinvesting capital in its business.
While Chipotle can't match the mind-boggling pace of new location expansion set by Yum! Brands, it should still manage to open at least 165 new restaurants in the U.S. by the end of this year. In addition, Chipotle plans to open between 165 to 180 restaurants in 2013. Thanks to each restaurant's relative simplicity and healthy gross and net margins of 27.6% and 10.4%, respectively, these new locations are able to quickly achieve profitability and begin generating new cash flow for the company. Furthermore, because Chipotle doesn't franchise, all of its nearly 1400 restaurants are company-owned.
Though management has stated domestic expansion will remain the company's primary growth driver for the foreseeable future, Chipotle is also testing international markets with plans to open in Germany during the first half of 2013 to build on its existing foreign base which currently includes five locations in London, four in Toronto, one in Paris, and one in Vancouver, Canada. When Chipotle has exhausted its growth options domestically, then, investors can look forward to further predictable growth in already-primed international markets.
In an effort to diversify, Chipotle has also launched a concept restaurant called ShopHouse, which effectively harnesses its proven burrito-wrapping prowess and applies it to delicious Asian food. With only one location in Washington D.C., it remains to be seen how ShopHouse will stack up to existing fast-casual Asian restaurants, including more than 1500 Panda Express locations managed by the privately-owned Panda Restaurant Group. This in mind, results from its pilot ShopHouse restaurant have been strong enough to prompt Chipotle to open two new locations, including one in Los Angeles and a second in D.C.
Given Chipotle's high returns on invested capital and ability to consistently generate more cash than it puts back into its business, many investors are discouraged management has avoided raising prices or expanding locations more quickly to keep up its previous break-neck growth rates in the face of currently-challenging economic conditions. Instead, the company has opted to use some of its excess cash for share buybacks, repurchasing a total of $388 million in Chipotle stock over the past four years at an average price per share of $117. During its most recent quarter, Chipotle also announced approval from its Board to allocate an additional $100 million for future share repurchases should its stock remain depressed.
Personally, I'm encouraged Chipotle has opted for patience in lieu of irresponsible price increases or unsustainable growth. Given the active implementation of its "Food With Integrity" mantra to its consistent refusal to grow for the sake of growth, investors should take comfort in Chipotle's insistence for methodically choosing prudence over haste. Though the market has punished shares of CMG in recent months, investors should view the pullback as a perfect opportunity to open a position in a solid, responsible company whose long-term growth story remains very much intact.
Steve Symington has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Motley Fool newsletter services recommend 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!