10 Stocks for 2013 - #5 - Chipotle

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

At Fastball Financial, we've compiled a portfolio of 10  great stocks for:

  1. Diversification across industries and market caps
  2. Growth in some of the hottest themes and industries
  3. Sufficient stability and dividends to offset potential market losses

Thus far, we've named Intuitive Surgical, Apple, F5 Networks and Starbucks to this portfolio.  For our 5th stock, we're adding another food service company, Chipotle (NYSE: CMG).  This fast-casual, Mexican food specialist has grown tremendously over the past several years.  The chart below shows Chipotle's rapid accent from < $50 back in 2009, up to around $300 currently.

<img src="http://media.ycharts.com/charts/ea9a9326691dfc19dbc67bc4ae55edfe.png" />

Chipotle's stock was pummelled during 2012, a year in which the broad market performed very well.  Investors grew wary of a stock whose P/E was getting over twice its long-term growth rate.  Now, with the PEG ratio (Price-to-Earnings-to-Growth) close to 1 when compared to its long-term growth rate, investors are getting a great opportunity to buy into an excellent long-term story.

Despite a lot of noise and worries, Chipotle remains a healthy company with a ton of growth ahead.  Much of the concerns about Chipotle come from margin pressures and lower same store sales comparisons.  Regarding margins, based upon Chipotle's history of cost fluctuations, that's a temporary concern, if it's even truly a concern at all. 

Regarding the same store sales, Chipotle is coming off an impressive run of double-digit same store sales comparisons.  At some point, the existing restaurants are going to reach a saturation point, especially in real dollars versus nominal increases.  Even while its same store sales decline into the mid-to-high single digits (a level that many restaurants would love to have right now), Chipotle's growth prospects remain strong because they are able to open new stores at a rapid and consistent clip.  As shown in the chart above, both revenue and net income growth are still up near 20%.

At a P/E of 35, Chipotle certainly isn't cheap, but if they can continue to grow like they know how, then this valuation will prove to be cheap a few years from now, much like it was back in 2009 - 2011.

Alternates: Buffalo Wild Wings and Dunkin Brands

If you're not sold on Chipotle's propects, then take a look at two other food service companies with similar regional to national growth opportunities: Buffalo Wild Wings (NASDAQ: BWLD) and Dunkin Brands (NASDAQ: DNKN).  Buffalo Wild Wings operates restaurants in the U.S. that focus on chicken wings and alcohol sales.  It's a bit riskier that Chipotle, in that its earnings have taken a significant hit recently, mostly because of higher costs of sale from food price increases.  However, they are still profitable, growing revenue rapidly and have the opportunity of expanding margins as food costs normalize.

<img src="http://media.ycharts.com/charts/2bac456939f8662b70ce7f97c5cdc983.png" />

As shown in the chart above, Buffalo Wild Wings' revenue continues to climb rapidly and shows no signs of stopping.  Also, same store sales comparisons are still in the mid-single digits, and they continue to open new stores across the U.S.  They are also starting to expand internationally.  However, the chart above shows that EPS growth has leveled off due to the aforementioned cost increases and a planned investment in technology infrastructure.  This has caused Buffalo Wild Wings' PEG ratio to spike temporarily.  All of these worries have sparked investor concerns and have kept the stock price down over the past year.  This presents an opportunistic investment in Buffalo Wild Wings while the earnings are temporarily lower than usual.  I expect this to be a good year for the company in light of its current valuation and future prospects.

If you're open to even more risk, look at Dunkin Brands.  Since going public again back in 2010, Dunkin Donuts has seen its stock rise nicely to the mid-$30's.  Nothing spectacular, but a solid gain.  Dunkin operates Dunkin Donuts and Baskin Robbins (ice cream) locations worldwide.  Both segments are expanding back into markets in which they had to close years ago due to poor results.  Now, with those ugly years behind it and plenty of new store openings to juice their future, Dunkin Brands looks poised to give investors the big returns they desire.  The company is reasonably well capitalized, meaning that they don't have more debt than they can handle.  The stock had a solid run in 2012, and I expect similar results in 2013.

<img src="http://media.ycharts.com/charts/5db2317ae657fc6bb1e8c25499c2e88d.png" />

Bottom Line

All three of these companies, Chipotle, Buffalo Wild Wings and Dunkin Brands, have wonderful growth prospects ahead and should provide good returns in 2013.  I think that Chipotle holds the best opportunity with its loyal following and still huge market to expand into.  Chipotle is a beaten-down stock that's giving its investors the best valuation compared to long-term growth than it has in a long time.  Buffalo Wild Wings and Dunkin Brands are both a more risky, but could also provide bigger returns if things go as planned for both companies.

Zaegs owns shares in Chipotle. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill. The Motley Fool owns shares of Buffalo Wild Wings and 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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