Gourmet burrito maker Chipotle (NYSE: CMG ) has seen its stock soar to unimaginable heights in the past five years, all while transforming the restaurant industry . Thanks to its success, Fast Casual IPO's from Noodles & Company (NASDAQ: NDLS ) to Potbelly (NASDAQ: PBPB ) have been sold to the market as "the next Chipotle."
Many investors have turned to those new "Chipotle's," because they feel they've already missed the real Chipotle's epic run. But, with same-store sales accelerating, this stock is still cheaper than its peers.
Valuation: the original is cheaper
When was the last time the "next" anything was as good as the original. Think about it.
Was Oasis as good as the Beatles? Was Vince Carter as good as Michael Jordan? No!
I ask that question somewhat tongue-in-cheek, but it's illustrative of how bankers have sold many restaurants to the public pre-IPO, hoping to ride Chipotle's coat-tails to success. I actually like both Noodles & Company, and Potbelly compared to most restaurants. I also think it's ridiculous to compare either restaurant to Chipotle, especially Potbelly, based solely on the fact that they are Fast Casual chains.
But, the markets have insisted on doing just that. Further, most investors have moved toward other options because they feel they missed Chipotle. However, on a relative basis, Chipotle is still the cheapest of the bunch.
This point has been made more than a few times, but many investors still consider Chipotle pricey. This is because we too often value stocks by anchoring to prices we've seen them at previously, rather than relative to earnings or growth.
Chipotle reported earnings today, with growth of 8.5%, but that doesn't tell the whole story; revenues were up a staggering 24.4%. We already know that Chipotle is cheaper on a forward P/E basis, but it still wouldn't be cheaper than Noodles and Potbelly if it was growing slower. Since food costs will take a bite out of all three companies earnings, revenues are a better measure of growth, as the chart below shows Chipotle is growing faster. So why does it trade at a discount?
If Chipotle's stock seems expensive to you just because it sells in the high $500's, even though it's cheaper than Potbelly and Noodles & Company on a forward P/E basis, you may be anchoring. Remember that stocks don't operate on a bell curve, if earnings grow, a stock price will never fully return to the pack.
If you can see the value in Chipotle here, you're thinking Foolishly.
Rising food costs make Chipotle a value stock
One sour note from Chipotle's most recent earnings call was that food costs took a small bite out of profits. But food inflation isn't something Chipotle will face alone; Noodles & Company is already feeling the pain of rising shrimp costs.
Food costs are always a headwind for restaurants; everyone has to deal with them. So the question becomes, who can handle them better? I recently said we couldn't expect Chipotle to top its staggering 9.3% comparable sales figure, I'm happy to be wrong, comps came in at a whopping 13.4%. All three of these restaurants are expecting to open new stores, but with Potbelly, Noodles, and most restaurants growing comps below 5%, they're more vulnerable.
Chipotle's same-store sales tell us a few things. We know Chipotle has fans so loyal that they are willing to drive through rough weather for a burrito. If that loyalty holds true, we can also assume that Chipotle will be able to pass on higher food costs to its customers. We also know that there is enough demand for Chipotle to open new stores, which should lead to more profits. In short, the ridiculously high comps just tell us that Chipotle has enough fan loyalty and demand to weather some rough storms.
Bottom line: comps have value
With robust and accelerating same-store sales, Chipotle is working its way through bad weather and higher food costs. With that in mind its the only restaurant chain we can expect to grow despite external factors. This all adds tremendous value.
If you can get over the fact that the stock sells at a high dollar value, you will see that Chipotle should be trading at a much higher multiple than its peers. On a relative basis, it's quite cheap.
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