Chipotle's Sustainable Spiciness

Chipotle (NYSE: CMG  ) may look like a pricey stock, but its sizzling fourth-quarter results explain why investors have been paying up for a piece of the action.

Fourth-quarter net income increased 47%, to $46.4 million, or $1.47 per share. Chipotle's revenue surged 24.5%, to $482.5 million, while comparable restaurant sales jumped 12.6%. Better yet, customer traffic growth -- not menu price hikes -- drove that strong increase in same-restaurant sales. Chipotle also raised restaurant-level operating margin by 140 basis points to 25.9%.

Rival Buffalo Wild Wings' (Nasdaq: BWLD  ) most recent quarter was pretty tepid, making the stock look too expensive. By comparison, I think Chipotle's quarterly results really deserve to drum up the excitement their seemingly high stock price implies.

Buffalo Wild Wings touts "sports, wings, and beer" as a major part of its formula for success, but Chipotle's got a truly lofty sense of purpose stuffed into its burritos. Through its "Food with Integrity" mission, Chipotle serves up food that's "sustainably grown and naturally raised with respect for the animals, the land, and the farmers who produce the food."

Chipotle's attitude toward ingredient selection is -- and has been -- ahead of the curve, which also puts it ahead of many rivals. As more consumers begin to shun factory farming, companies are recognizing that they need to do a better job of seeking more humane profits. Chipotle's got first-mover advantage in that respect, which helps the company differentiate itself from other quick-serve restaurants.

At 41 times forward earnings, Chipotle's seemingly pricey multiple could give value-minded investors a major pause. That dizzyingly high number makes Buffalo Wild Wings' forward price-to-earnings ratio of 21 appear (emphasis on appear) to be a bargain. Then compare those multiples to those of McDonald's (NYSE: MCD  ) and Yum! Brands (NYSE: YUM  ) , which trade at 14 and 16 times forward earnings, respectively.

Chipotle's stock may not look like a steal, but its solid corporate mission of affordable, high-quality food, and the heady growth it already delivers, indicate a promising future. What looks expensive now should end up a bargain in the long run.

What do you think? Can Chipotle keep up its amazing growth? Let us know in the comments box below.

Chipotle is a Motley Fool Rule Breakers recommendation. Buffalo Wild Wings and Chipotle are Motley Fool Hidden Gems choices. The Fool owns shares of Chipotle and Yum! Brands. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. 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.


Read/Post Comments (7) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On February 11, 2011, at 2:32 PM, valueinvestor99 wrote:

    Still stock continues to soar and as long as customers want to by 3 times what similar fare would be a Taco Bell then margins keep it in the game. I suspect when market realizes the inflation inherent with food and commodity prices, and earnings can't keep pace unless the FED tosses more good maonry after bad, this market is headed fror trouble and CMG will fall as quick as it climbed.

    As a customer, I dislike CMG. Claims to be a health food stock when it's an over stuffed burrito stock filled with lettuce, bans and a little meat or chicken. You pay way TOO MUCH for what you get. As long as the green peacers flock to thge place it will be OK, but at this price it's NOT an investment like the FOOL indicates, it's a crap shoot and the role of 7's is close to ending IMO.

  • Report this Comment On February 11, 2011, at 2:34 PM, sana5000 wrote:

    I agree with the author about CMG. I have invested in this stock for 2 years and have been rewarded nicely. I travel a great deal and have visited about 10 of these restaurants in different states. They are well run, they staff well trained and surprisingly friendly. The "food with integrity" principle is a powerful and attractive value add.

    I don't think this stock will continue its meteoric rise, but will be a steady winner for years to come. I hope/anticipate it will be a $ 300 by this time next year

  • Report this Comment On February 11, 2011, at 2:54 PM, EquityBull wrote:

    As a customer I love Chipotle. As a shareholder I'm very happy here. I think the shares a maybe 10 or 20 bucks over priced here but in the wordl of Mr. Market that really isn't much. We could see it swing down to 220 or up to 300 and back again. The price really depends on the growth sustainability because a lot of the price is now in the heady multiple.

    With higher labor costs coming as a result of the illegal workers and rising food costs I think 2011 will be more challenging plus the comps will be tougher. My bet is that it will grind around 240 to 280 range up and down for the next couple quarters while earnings catch up and the hit from these factors peels off some of the growth (maybe 5% or 10% leaving it with 35% to 40% growth). At 40x we arrive at about 240 to 280 with no margin of safety

  • Report this Comment On February 11, 2011, at 7:20 PM, trecer wrote:

    Folks like valueinvestor99 just don't get it. A negative attitude toward Chipotle's food is clearly a narrowly subjective criterion of evaluation, disproved by the steady increase in the company's customer base. Chipotle's food is in fact of extremely high quality and delicious. The meats are cooked exquisitely, and they come from high quality stock (organic pork, etc.). Customers really like it. It's more authentically Mexican than a few American consumers would like--i.e., folks who prefer Uncle Ben's converted rice, salsas with no character, and the "processed" flavor you get at other chain stores.

  • Report this Comment On February 11, 2011, at 7:44 PM, baselineace wrote:

    Rising food costs are not a legitimate concern (in this case) - Chipotle's menu is already priced below equilibrium, and the company has indicated it intends to raise prices this year. Relatively speaking, Chipotle will be an even better value when other outlets are forced to raise their (already) high prices as Chipotle remains a great value and looks like an even better value in comparison to its peers. Expect operating margins to RISE in 2011.

    The labor issue is certainly one to keep an eye on, however. One of Chipotle's core competencies has been excellent, speedy service and the recent turnover of talented employees is an unwelcome disruption to productivity.

    Regarding the high valuation, I would not be overly concerned. Apple was an EXCELLENT buy several years ago when it's P/E was over 50. Granted Chipotle is not a tech company, it has been growing like one. Chipotle's locations are concentrated around major cities and there's plenty of opportunity out in the 'burbs that has yet to be tapped. Let's not forget to mention that the company is rolling out new Asian restaurants soon, which are certain to be just as successful as long as Chipotle's visionary CEO Steve Ells is piloting the ship.

    I may not be a Wall Street analyst, but I have been far better at forecasting future performance than they have on this stock.

  • Report this Comment On February 12, 2011, at 1:41 PM, culverlake wrote:

    valueinvestor99, states he can get "similar fare" at Taco Bell.....not even close. CMG is extremely well run, the food is excellent (way better than Taco Bell) and its prices are in line with other similar restaurants like Panera. I go to both and basically spend about the same...sometimes LESS in CMG. Further, assessment by other folks commenting here are correct in terms of long range goals and stock pricing. CMG is just getting started.

    Perhaps valueinvestor99 should consider having his/her taste buds reassessed.

  • Report this Comment On March 27, 2011, at 5:17 PM, augana wrote:

    I went to Taco Bell once and I will never come back. The food was horrible, overcooked probably a million times and I will never come back.

    However, ever Chipotle is a totally different story. Just go to any store and you'll always see a long line of people waiting. And the opportunities for growth are almost limitless as some people have pointed out already. The question is whether the potential growth is already factored in the current valuation. What if the profit in Asia or in other suburban areas is not as big as expected by Wall Street?

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