3 Companies to Replace Chipotle

When you're the leader of the pack, everyone is gunning for you. Unless the leader is Usain Bolt -- then people are gunning for whoever's No. 2, because there is no way they're catching Bolt. But Chipotle (NYSE: CMG  ) isn't Usain Bolt -- it's a restaurant that sells big burritos. With its most recent earnings report, the company dashed the hopes of investors looking for otherworldly growth. Investors need to know what did the company do wrong, and if are there other companies doing the same thing -- but doing it better.

The mighty, fallen
Chipotle announced its second-quarter earnings last week, and as of today the stock is down about 26%. A fall like that usually comes after some horrible news, but for Chipotle that wasn't the case. Revenue was up 21% on last year, same-store sales grew 8%, and net income was up 61%. So why the drop?

In the world of growth stocks, expectations are everything. The analysts on the Street were expecting revenue to increase to $706 million, but Chipotle turned in just $691 million. While the company did beat earnings-per-share expectations, the shortfall in revenue and single-digit same-store-sales growth made investors nervous about future growth. Even though the company is still running quickly down the track, it's no longer running as fast as the bookies predicted.

A challenger appears
On the other end of the spectrum, Panera Bread (Nasdaq: PNRA  ) beat analyst expectations in its recent earnings release. Second-quarter earnings came in at $1.50 per share, while the Street was expecting only $1.43. Again, expectations are everything, and shares in the restaurant chain are up 10%. The company expects to be able to push those gains through the rest of the year as well, forecasting a 26% to 27% increase in full-year earnings per share.

Panera has done well to carve out a niche for itself recently, fighting off the stigma that it's just a big Starbucks (Nasdaq: SBUX  ) . In fact, Starbucks investors might be interested in the extra diversity that Panera brings to the table. While the coffee giant grew revenue 13% in its last quarter, its recent purchase of La Boulange Bakery shows that it understands the value of having a larger food menu. Panera has the food menu already in place and is seeing the strength of that offering.

The value of diversification
Chipotle has recognized the need to expand its horizons as well. The company's Shop House concept was designed to expand the range of offerings available, adding Southeast Asian cuisine to the company's toolbag. Unfortunately for investors, the concept has yet to expand beyond one D.C. location. CEO Steve Ells has announced the opening of a second restaurant later this year, but there have been no details on how the concept is going to really take off.

Chipotle's early provider, McDonald's (NYSE: MCD  ) , has also seen the value of diversification, entering into tacit competition with Starbucks through the launch of its McCafes. Even though McDonald's missed in its most recent quarter, the company still attributed small revenue increases to the new in-store coffee shops. The additional options for customers are acting as a pull, getting new customers through the door, and increasing the value of existing customers.

The bottom line
Chipotle has yet to make the leap from excellent, single-minded restaurant to excellent diverse chain. While the growth figures continue to be strong, they're not strong enough to justify the company's rich valuation. While stalwart McDonald's trades at a forward P/E of only 15, Chipotle is still sitting at 27. Even with the recent pullback, there's still a lot of anticipation in this stock.

I'd rather climb in with Starbucks. The company has made some excellent moves this year, including the bakery purchase. The second half of the year promises all sorts of new fun, as the company is introducing its own line of brew-at-home machines to compete with Green Mountain Coffee Roasters. I think the combination of in-store diversification and the move into more homes is going to lead to continued strong growth for the coffee giant.

Chipotle's future is just too hazy for me to get behind. I see the end goal but don't understand how the brand moves from here to there. Panera, Starbucks, and McDonald's all have understandable futures, and I like the looks of them all. In fact, McDonald's plan is so good that the company has made the Fool's list of 3 American Companies Set to Dominate the World. You can find out all about the other two companies in this special free report. It details why we think global growth is in the cards for these three, and why investors should get in now. Get your free copy today.

Fool contributor Andrew Marder owns none of the stocks mentioned in this article. The Motley Fool owns shares of Panera Bread, McDonald's, Starbucks, Green Mountain Coffee Roasters, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Panera Bread, Green Mountain Coffee Roasters, Chipotle Mexican Grill, Starbucks, and McDonald's, creating a lurking gator position in Green Mountain Coffee Roasters, and writing covered calls on Starbucks. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 01, 2012, at 5:51 PM, EquityBull wrote:

    How many more McDonald's or Starbucks stores can be built without heavy cannibalization?

    The future in chipotle is that they are under 1500 stores with room in the USA for 8000 to 10000 units and at least the same international. This is a multi decade story unfolding.

    Also Shophouse is a wild card. If it hits that could be a similar store count.

    I think more upside in 10 years for chipotle than the other companies you noted with possible exception of panera.

  • Report this Comment On August 03, 2012, at 11:20 AM, naughtyguy wrote:

    The drought will cause a big increase in food costs. Restaurant revenues might suffer as they try to pass on these costs to the consumers. If they don't pass on the costs their earnings will suffer.

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