The Best Retail Stock for 2007: Chipotle

What do you get when you take seasoned pork, add some rice and beans, a bit of cheese, some corn salsa, and wrap it up in a burrito? First, you get an analyst drooling on his keyboard. Second, you get my go-to order at Chipotle (NYSE: CMG  ) . But most importantly, you get a recipe for making cash.

A spicy outlook
I've chosen Chipotle as 2007's best retailer because it's a fantastic business. In fact, I think Chipotle and its amazing prospects could be one of those stocks you have to own.

If you were going to open and operate a nationwide chain of fast-food restaurants, who would your model be? I imagine most of you immediately said McDonald's (NYSE: MCD  ) . And that's one reason why Chipotle has an advantage over its competitors: It was guided by McDonald's leadership for years before its 2006 spinoff. Trust me, this company knows how to operate a restaurant.

While Wendy's (NYSE: WEN  ) had to sell its Baja Fresh concept, and Jack in the Box's (NYSE: JBX  ) Qdoba is still fairly small, Chipotle is growing fast and performing well. Its high-quality made-to-order Mexican delights are becoming increasingly ubiquitous. And while Yum! Brands' (NYSE: YUM  ) Taco Bell is certainly much larger, it doesn't necessarily share the same target customer or the same food offerings. Chipotle has a limited menu, assembled on demand to suit each customer's whims. Taco Bell is a tremendous operator its own right, but it does so with a relatively fixed menu and pre-made ingredients.

The wisdom of crowds
But you don't have to take my word for it. Here's what some in our CAPS community are saying:

  • "big market to exploit"
  • "in a demographic sweetspot"
  • "Have you been to a Chipotle that does not have a line most of the day?"
  • "they learned from the best"

See? I'm not the only one who thinks there's a big future for Chipotle.

Awesome performance
OK, so Chipotle's got a great story. But Foolish investors don't invest in stories alone, right? A company has to be able to generate value for shareholders, and it has to offer an attractive price in the market. Fortunately, as you can see from the data below, Chipotle is generating better and better performance as it opens new stores. Check out these hot numbers:

2002

2003

2004

2005

TTM

Stores

232

305

409

489

592

Gross Margin

25.3%

28.8%

29.9%

31.7%

33.2%

Op. Margin

-7.9%

-1.1%

1.7%

5.4%

7.8%

Operating Cash Flow

$6.0

$22.1

$39.7

$77.4

$98.4

Data from CapitalIQ
Dollars in millions


So Chipotle has excellent prospects and performance. What about the price? I'll be the first to admit it certainly looks expensive. However, using a thumbnail discounted cash flow analysis, I don't have to make aggressive assumptions to see that Chipotle is a bit undervalued today.

Enough about what I think. What do you think? Will Chipotle be the best retail stock in 2007? Whether you agree or not, let us know by joining our CAPS community and rating Chipotle "outperform" or "underperform." One quick click is all you need to get started in our free investing community. Based on your inputs, we'll determine the best retailer for 2007 early next week.

For more on great quick-serve restaurants, check out:

Go back to the beginning to see what other retail stocks are in the running for our CAPS contest.

Retail editor and Inside Value team member David Meier does not own shares in any of the companies mentioned. He is currently ranked 437 out of 19,864 investors in CAPS. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.


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