An End to Chipotle's Bull Run?

David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are looking to get into restaurant stocks, there are several variables you should consider: (1) geographical exposure, (2) new growth into different markets, (3) multiples, and (4) competitive pressure. From Starbucks to Chipotle to Panera, the market has seen several restaurant chains fly high in recent years. Does the potential for a continued bull run still exist? This answer can be found through considering multiples and margin expansion opportunities. Below, I review three stocks and provide my take on their futures.

Chipotle Mexican Grill (NYSE: CMG) Vs. Yum! Brands (NYSE: YUM)

Chipotle has seen explosive EPS growth--a rate of 40% in the last 5 years. This has granted the company a strong balance sheet with no debt and a current ratio of 4.1x. Total cash now stands at $574 million, or $18.22 per share. While the company looks expensive at 31.2x past earnings, its always important to consider how this relates to growth. Analysts forecast 21.5% annual EPS growth over the next 5 years. This means that, assuming the company meets expectations, 2016 EPS will come out to $18.66. At a multiple of 18x, this translates to a future stock value of $336. Discounting backwards by 10% yields a present value of $208, implying that the stock is around 25% overvalued.

But how are the fundamentals and corporate strategy? First, I like the company's shift away from "Mexican food only" to an ethnic cuisine strategy. The opening up of a ShopHouse restaurant that features Southeast Asian food in a similar setup to the core Chipotle chain represents a major catalyst. Famous short seller David Einhorn, however, contends that Yum!'s new menu is a threat to the expansion strategy. The recent decision to double the share repurchase program to $200 million in throws a wrench into Einhorn's outlook--management is confident that the growth curve ahead makes today's share price compelling. Even though it has fallen nearly 40% from the 52-week high, analysts seem to be siding with Einhorn with 15 of the 24 reporting analysts calling the stock a "hold" or worse.

In particular, guidance for flat to low-single digit same-store sales growth in 2013 makes it hard to justify previous growth estimates mentioned above. This has been reflected in slowing growth--comparable stores were only up 4.8%  in the third quarter. However, I believe the catalyst comes from as much as 180 new restaurants opening next year, which won't fully pay off until 2014.

Yum!, which owns KFC, Pizza Hut, Taco Bell, and a non-controlling stake in Little Sheep in China, has also been hit hard in recent days. It fell around 8.4% as a result of growing pessimism surrounding trends in China. Even still, management is looking to further expand in China and secure its dominant fast food position in the region. 700 restaurants will be open next year in the emerging market. Better yet, management is looking towards India for its next high-growth target. In light of emerging markets now making up around half of EBIT (as opposed to 40% three years ago), the upside to an investment now is strong and hedges against domestic uncertainty. Just last Friday, Bernstein Research even said that the US growth story remains compelling and expects management to meet or even best its double-digit growth targets for earnings. New partnerships, like Yum!-PepsiCo, and the introduction of Taco Bell's Doritos Locos, have helped drive this bullishness.

Why You Should Buy Fiesta Restaurant (NASDAQ: FRGI)

But what if you could invest in Chipotle when it was just starting to form its growth trend? Needless to say, you would have been very well off today. Though that opportunity may now be gone for new Chipotle investors and definitely newYum! investors, investors still have the opportunity to make it big in small cap stocks. Fiesta Restaurant Group is currently valued at $318 million and has around $500 million worth of annual sales.

Fiesta Restaurant has two chains, Taco Cabana and Pollo Tropical, and 287 restaurants in Latin America, the Caribbean, and the southern United States. Taco Cabana recently teamed up with Dr. Pepper for a Cotton Bowl sweepstakes that will help generate greater customer recognition. The problem is that sales have failed to grow at a double-digit rate that is meaningful for a company of this valuation and a 38.6x FY14 earnings multiple. 

However, operating expenses have fallen significantly and have yet to be fully realized by the market. In fact, free cash flow was $20.3 million in FY 2012 versus $7.8 million in FY 2013. The current yield of 6.4% may not be incredibly strong, but there still is an $18 price target. Return on invested capital is also excellent at 19.7%. As the economy improves, investors will start focusing on this margin expansion and promising emerging market potential.

TakeoverAnalyst 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. 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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