Is Chipotle Mexican Grill Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Chipotle Mexican Grill (NYSE: CMG  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Chipotle's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Chipotle's key statistics:

CMG Total Return Price Chart

CMG Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

78.2%

Pass

Improving profit margin

11.3%

Pass

Free cash flow growth > Net income growth

96.5% vs. 98.2%

Fail

Improving EPS

101%

Pass

Stock growth (+ 15%) < EPS growth

194.5% vs. 101%

Fail

Source: YCharts. * Period begins at end of Q2 2010.

CMG Return on Equity Chart

CMG Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

9.2%

Pass

Declining debt to equity

No debt

Pass

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we're going
Chipotle comes through with flying colors, as it earned five out of seven passing grades. One of those failing grades only happened due to the narrowest underperformance -- free cash flow has grown right in with net income, and could easily surpass it by the time we look at Chipotle again. This is a strong performance, but can Chipotle keep up its progress without allowing its share price to run away from its fundamentals?? Let's dig a little deeper to find out.

Chipotle recently beat Wall Street's expectations on both top and bottom lines, which isn't surprising for those who've followed the stock for some time. Foolish intern JP Bennett points out CEO Steve Ellis' long-standing and very ambitious goal of changing people's perception about fast-food restaurants. Ellis has focused on creating high-quality fast-food outlets along with fostering a robust work culture. That's worked so well to date that other chains have begun to emulate the strategy.

According to the Pew Research Center, there are some 160,000 fast food restaurants across the U.S., serving about 50 million people, every day. My fellow Fool Sean Williams notes that people have been turning away from fast food due to increasing public awareness of their generally poor nutrition, which is pushed to the fore by healthy lifestyle campaigns (often funded by governments). Despite these underlying concerns, the American fast-food market has grown substantially, from $151 billion in 2003, to $200 billion in 2013. Since Chipotle rarely suffers the same negative health perceptions as its peers, the burrito maker could see outsized gains from the combination of these two trends.

Chipotle's immediate rivals Yum! Brands (NYSE: YUM  ) and (to a lesser degree) Noodles & Co. (NASDAQ: NDLS  ) are also expanding their product offerings and national footprints. Colorado-based Noodles has been growing at 16% per year, and it has a lofty plan to launch another 2,500 restaurants within the next two decades. On the other hand, Yum! Brands appears to be moving into Chipotle's turf with a new concept called "KFC eleven," which bears certain stylistic and operational similarities to Chipotle. The new concept's Chipotle-like assembly line might pose a threat to other fast-food companies in the market, according to longtime Fool Rick Munarriz.

Putting the pieces together
Today, Chipotle has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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