3 Reasons Chipotle Will Blow the Market Away

Editor's note: An earlier version of this article incorrectly said Chipotle would release earnings after market close Tuesday. The article has now been corrected.

It's easy to get nervous about Chipotle Mexican Grill (NYSE: CMG  ) heading into Thursday's earnings report.

The stock's been on a tear. It was trading in the double digits a year ago. It closed at $247.55 yesterday. Earnings have been strong but not that strong. In other words, the bottom-line multiples have been expanding. Chipotle now trades at 48 times what analysts believe the burrito chain earned last year and 37 times forward profitability.

There are also cost concerns as commodity prices skyrocket. Let's also not forget last month's hiring scandal where Chipotle had to fire hundreds of undocumented immigrants working in its Minnesota restaurants.

You just haven't lived as a chain until you have protesters chained up to one another in one of your stores holding up signs that read "Chipotle: You cannot sell Mexican food and then sell out Mexican workers."

Well, let me set your mind at ease. Let's go through a few reasons not to worry about the fourth-quarter report.

1. Food cost concerns are overblown
Investors weren't impressed with Taco Bell parent Yum! Brands' (NYSE: YUM  ) last week. The company is facing more than just the same food price spikes that rival restaurant operators are seeing. Yum! Brands -- primarily its KFC chain -- is huge in China where labor costs are rising in the midteens. This may be a concern if you're an investor in Yum! or China's Country Style Cooking (Nasdaq: CCSC  ) , though China's booming economy makes it easier for eateries to pass their food costs along.

However, even under a climate of rising food costs globally and a labor spike overseas, Yum! managed to post a 27% gain in earnings on a mere 7% top-line uptick. In other words, net margins expanded. Chipotle's been the same way over the years, and it's not married to $0.99 price points the way Taco Bell is.

Besides, food and beverage costs gobble up less than a third of Chipotle's revenue. Any menu price hikes to adjust for higher component prices will be smaller on a percentage basis than what consumers are seeing at the supermarket.

2. Estimates are moving targets
Analysts see Chipotle's earnings climbing 30%, to $1.29 a share, in the quarterly report.

Good luck if you believe it. Chipotle has routinely landed ahead of Wall Street guesstimates since it was spun off by McDonald's as a stand-alone public company. It has beaten the profit projections in each of the past eight quarters, and it hasn't even been close lately.

  EPS Estimate Difference
Q4 2009 $0.99 $0.81 22%
Q1 2010 $1.19 $0.95 25%
Q2 2010 $1.46 $1.39 5%
Q3 2010 $1.52 $1.31 16%

Source: Thomson Reuters.

I wouldn't bet against it this time around, either.

3. The economy is bouncing back
Chipotle managed to grow comps during the recession, which is a stiff challenge when you think about unemployment affecting lunchtime traffic and emptier pockets forcing consumers to eat in at night.

Is there any reason to believe that consumers have tired of Chipotle? This is a concept that has transcended the malaise inherent in rival burrito rollers at Baja Fresh, La Salsa, and Jack in the Box's (Nasdaq: JACK  ) Qdoba. If anything, the improving economy will mean that consumers spoil themselves by tacking on a bag of tortilla chips to their orders or going for the premium guacamole add-on.

Blowout quarters have a funny way of debunking overvaluation myths. We'll see if that holds up yet again for Chipotle.

Are restaurant stocks good investments these days? Share your thoughts in the comment box below.

Country Style Cooking Restaurant Chain and Chipotle are Motley Fool Rule Breakers recommendations. Chipotle is a Motley Fool Hidden Gems selection. The Fool owns shares of Chipotle, Jack in the Box, and Yum! Brands. 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.

Longtime Fool contributor Rick Munarriz can walk to a Salsarita or jog to a Baja Fresh or a Qdoba, but prefers the short drive to his local Chipotle. He does not own shares in any of the companies in this story, except for Country Style Cooking. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (14)

Comments from our Foolish Readers

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  • Report this Comment On February 08, 2011, at 12:06 PM, IKNOWMYS wrote:

    I was under the impression Chipotle reports after the market closes on Thursday 1/10/2011?

  • Report this Comment On February 08, 2011, at 12:46 PM, nclausen wrote:

    Lets talk about this companies hiring practices!! In Minnesota, they had to fire HUNDREDS of workers because they were illegal aliens!! Is that the road to profitability that you support? How about if they used substandard ingredience in their food? OF were just plain a health risk? Would that be OK as long as you get a profit?

    THis company needs a solid wakeup call from ALL American consumers! As penalty for your hiring practice, I say Americans stop buying Chipolte product for 1 month. Lets see if their rigorous company can survive the wrath of angry unemployed Americans!

  • Report this Comment On February 08, 2011, at 1:39 PM, gdf55 wrote:

    Good luck with that, @nclausen. The restaurants are clean, the food is good and much healthier than McDonald's, and the hiring issue you mentioned was limited to a small number of stores and has been addressed.

    A little righteous indignation can be a good thing. You might want to save it for something more meaningful.

  • Report this Comment On February 08, 2011, at 1:50 PM, baselineace wrote:

    Chipotle will report earnings after the market closes on Thursday, February 10th. Please get your facts straight!

  • Report this Comment On February 08, 2011, at 2:26 PM, TMFKris wrote:

    The quarterly report date has been corrected. Thank you for pointing out the error.

    Kris -- TMF copyeditor

  • Report this Comment On February 08, 2011, at 4:54 PM, baselineace wrote:

    Can I have a burrito now, Kris?

  • Report this Comment On February 09, 2011, at 1:52 PM, hopalong0110 wrote:

    Time for Steve and Monty to join the 300 club. Chipotle had a "situation" and "executed" flawlessly to rectify it. Angry Americans can go calm down and eat themselves a boorito.

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