Why Chipotle is Still Delicious

Grant 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) took a beating in 2012, smashed by future earnings estimates, rumors of competition with YUM! Brands’ (NYSE: YUM) Taco Bell, and the possibility of raising their prices.

Let’s take a look at the earnings reports of 2012.  Chipotle met the consensus of the 26 analysts following the company in both the 1st and 3rd quarter, and exceeded them for the 2nd quarter.  Why would they go down one might ask?  Because they lowered their growth estimates for the upcoming year. The point I think many are missing is that even though growth estimates have been lowered, they still are great; next year earnings are expected to grow 16%.  Another thing to look at is since 2009 Chipotle has either met or exceeded their earnings reports, so lowering future estimates might be a precursor for another earnings surprise.  Fourth quarter results are expected during the week of January 28. 

The business lost to Taco Bell is inaccurate in my opinion.  Taco Bell is like the McDonald’s of coffee in comparison to Starbucks. Yes, some people do get their coffee from McDonalds, but the ones who like Starbucks stick with Starbucks and that figure continues to grow.  In this industry Chipotle's only real competition is Qdoba (owned by Jack in the Box (NASDAQ: JACK)) that has much fewer stores.  Personally after visiting both a couple times I enjoy the taste of Chipotle more and also find their establishments to be more employee friendly.  

Taco Bell’s recent Cantina Bell menu has focused on "all natural ingredients," but if someone really wants to be healthy they are not going to go to Taco Bell. It just doesn’t make sense.  Taco Bell is still fast food; they make it in the back off of a company recipe and give it to you pretty much right away. Chipotle is casual dining you can get to go (a growing trend) ,but you personalize your meal to what you want; basically Subway, but in the Mexican food industry.  Founder and Co-Chief Executive Steve Ells said during a conference call that "I think that's why you have such a high frequency at Chipotle; It's because of that ability to customize."  Chipotle’s “Food With Integrity” slogan also embraces another movement in America towards naturally raised animals, local family farms (cuts down on transportation costs), and no hormones or antibiotics.  Americans are willing to pay more for quality and they know Chipotle is quality.  

Overall, I believe Chipotle is poised for a comeback in 2013 and am seriously considering purchasing some shares.  The profit margin (10%) is very delicious and there is a growing trend of people who are willing to pay for good quality food instead of that cheap mashed together chicken sandwich.  I know there will always be a market for the dollar menus, but what makes Chipotle so attractive to me is that their customer base is growing, and so is their store count.  Chipotle is still a solid growth option in my eyes.  


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