Is Chipotle Likely to Deliver Tasty Returns?

With shares of Chipotle Mexican Grill (NYSE:CMG) trading at around $339.67, is CMG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

What makes Chipotle special? Up until this point, it has been local and fresh ingredients that are cooked in an open kitchen. This simple yet effective game plan has led to strong revenue growth throughout the years. Chipotle must also be confident about future potential since it’s opening up to 180 more restaurants this year. However, is this overly ambitious?

Food costs have increased 22 percent. Chipotle plans on combating the increase by raising menu prices. That’s a logical solution in a normal economy, but this isn’t a normal economy. Wall Street might be doing well, but Main Street is suffering. In other words, consumers aren’t as strong as they were in the past. Therefore, this will be a risky move.

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There have been other warning signs for Chipotle as of late. One is comps, which is more important than anything else in the restaurant industry. In 2011, comps were 11 percent. By the end of 2012, comps were only 3.8 percent. That’s a significant decline, and there are no signs to indicate that the trend will reverse course and head back in the right direction. All that said, 3.8 percent is more on par with the industry average.

Other concerns include margin pressure, the stock trading at a high multiple, and several ideas that indicate Chipotle can’t rely on its current game plan for impressive growth. For instance, Chipotle is selling attire such as hats and hoodies to appeal to the young and hip crowd. This might add some revenue, but it’s certainly not going to take off. Chipotle is also considering catering as a possibility. To be blunt, so what? Maybe some numbers will offer a little more exciting.

The chart below compares basic fundamentals for Chipotle, McDonald’s Corp. (NYSE:MCD), and Yum! Brands (NYSE:YUM). These three companies differ in size. Chipotle has a market cap of $10.30 billion, McDonald’s has a market cap of $101.19 billion, and Yum! Brands has a market cap of $30.12 billion.

CMG

MCD

YUM

Trailing   P/E

38.72

18.83

19.77

Forward   P/E

27.30

15.94

17.45

Profit   Margin

10.18%

19.82%

11.71%

ROE

24.28%

36.82%

76.06%

Operating   Cash Flow

$419.96 Million

$6.97 Billion

$2.29 Billion

Dividend   Yield

N/A

3.00%

2.00%

Short   Position

14.80%

1.30%

2.20%

 

McDonald’s is more impressive than Chipotle in every single category. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Strong       

The debt-to-equity ratio for Chipotle is stronger than the industry average of 0.90. And, yes, this is one area where Chipotle is stronger than McDonald’s.

Debt-To-Equity

Cash

Long-Term Debt

CMG

0.00

$47.286 Million

$3.53 Million

MCD

0.89

$2.34 Billion

$13.63 Billion

YUM

1.27

$776.00 Million

$2.94 Billion

 

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T = Technicals on the Stock Chart Are Strong   

The stock has had some hiccups over the past year, but the past three years as a whole has been very impressive. The one big negative is that Chipotle doesn’t pay a dividend.

1 Month

Year-To-Date

1 Year

3 Year

CMG

5.48%

13.14%

-18.51%

177.10%

MCD

2.69%

15.85%

7.23%

61.99%

YUM

-0.28%

2.23%

0.50%

76.05%

 

At $339.67, Chipotle is trading above all its simple moving averages.

50-Day   SMA

318.97

100-Day   SMA

300.80

200-Day   SMA

308.27

 

E = Earnings Have Been Strong                     

Revenue and earnings have consistently improved on an annual basis.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

1.33

1.52

1.84

2.27

2.73

Diluted   EPS ($)

2.36

3.95

5.64

6.76

8.75

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings. However, on a sequential basis, revenue saw a slight decline, and earnings saw a moderate decline.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

596.75

640.60

690.93

700.53

699.16

Diluted   EPS ($)

1.81

1.97

2.56

2.27

1.95

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

There are many headwinds for the industry at the moment, which include rising costs, slowing traffic, and questionable demand in China.

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Conclusion

The stock is expensive, and strong growth is no longer a guarantee. Chipotle delivers some very big profits, but slowing comps are cause for concern.

Overall, Chipotle is a solid company that currently has a lot to overcome. McDonald’s is likely to be a safer long-term option, and the 3.00 percent yield is an added bonus.

Chipotle is a WAIT AND SEE.

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