3 Questions That Chipotle Must Answer

It's been a good year for Chipotle, but to beat out competitors Panera Bread and Yum! Brands in 2014, it must first answer three questions.

Jan 5, 2014 at 8:00AM

Chipotle Mexican Grill (NYSE:CMG) is the gourmet fast-casual burrito maker from Denver that has taken the market by storm. After a year of tremendous growth, can Chipotle continue to avoid the pitfalls that have hit fast-casual competitor Panera Bread (NASDAQ:PNRA)? Or will price competition from Yum! Brands (NYSE:YUM) Taco Bell finally catch up to this growth stock?

Here are three questions that Chipotle must answer to remain a top stock in 2014. 

How many locations can it support?
One critical thing that we must remember is that Chipotle is a growth company, and it's priced for growth. The stock has doubled this year, it now trades at 50 times earnings and five times sales, and anything less than excellent performance will not do. 

Just look at Panera. It's growing, just not as fast due to service "bottlenecks" that couldn't meet growth, and the stock has dropped. Profit in its recent quarter rose 17%, but the overrall growth profile is slowing, and that's hurt the stock.

Chipotle has five-year EPS growth of more than 30%, revenue growth in excess of 20%, and its most recent quarter was an absolute blowout. What should we be watching to ensure that growth continues?

Here's the critical growth question that Chipotle must answer: How many locations can it support? With 1,500 restaurants already, the company needs to start thinking about how many new markets it can penetrate, both domestic and international. If Chipotle's new store count slows, even if the existing stores do well, growth won't be strong enough to support a higher stock price. 

How fast can Chipotle's other brand concepts grow?
If you're skeptical about Chipotle supporting 3,000 locations, or growing internationally, there still may be opportunity. Chipotle has two new brand concepts outside of its namesake: ShopHouse and, now, Pizzeria Locale. 

ShopHouse is an Asian concept that has been well received, but has relatively few locations: a few in California and a few in the Maryland/D.C. area. Pizzeria Locale has an interesting story behind it. Chipotle co-founder Steve Ells became an ardent fan and believes that Chipotle's business model will work for pizza. Chipotle is a minor shareholder in this Neapolitan pizza maker, but it has the option to become a full owner. 

Both of these businesses have the "Chipotle model" of quality food, being cooked quickly in front of customers at a reasonable price. Do you believe that this strategy will work for an Asian concept, and wood-fired pizzas? That's the question to ask yourself if you're expecting another leg to this growth story. 

At what point does price become an issue?
About 250 points ago, hedge-fund manager David Einhorn made a very public short call on Chipotle. His thesis was that he thought Yum! Brands' Taco Bell was going to offer competition through its "Cantina Bowl," and that Chipotle's high prices would lead customers to Taco Bell. 

Einhorn is a very smart guy, but the short was clearly ridiculous to anyone who has eaten at Chipotle or Taco Bell. Taco Bell is synonymous with cheap, guilty-pleasure junk food, and with the Doritos line of tacos, it has refocused its brand.

While Chipotle customers were never going to leave for Taco Bell, I do at least understand why Einhorn made the call. At some point, if Chipotle has to increase prices much more, price could become an issue. Chipotle customers go to their restaurants for quality; might they "upgrade" to upscale Mexican restaurants instead? Maybe.

It's all about the value proposition. Chipotle needs to retain quality while staying affordable enough to fend off higher-end Mexican restaurants. So far it's been able to do this, and my bet is it will continue to do so, but that's definitely something investors should keep an eye on. 

Foolish thought: Bet on Steve Ells
Chipotle is now in a tough spot, as investors are expecting perfection. There will surely be speed bumps ahead, but what gives me comfort is Steve Ells' track record of being in front of the consumer. Chipotle makes food that people love, and by listing the GMOs in their products and supporting local farmers, it's building loyalty and good will among its customers.

To execute from here, Chipotle needs to answer our three questions with action. Can the company control costs, support additional locations, and successfully grow new brands? Let's keep an eye on it, but with this innovative management team, I'm betting it can. 

Want to get in on the next big growth stocks?
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Fool contributor Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers