Chipotle's Stuffed With Growth

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Chipotle (NYSE: CMG  ) gave investors something to cheer about with a highly appetizing third-quarter earnings report.

Third-quarter net income increased 39.9% to $48.2 million, or $1.52 per share. Revenue surged 23% to $476.9 million. Restaurant comparable-store sales increased an impressive 11.4%.

Here's another reason for investors to stand up and cheer for Chipotle. The company's strong growth largely resulted from increased customer traffic -- exactly what we want to see from a restaurant company right now. Those new customers helped drive restaurant-level operating margin up 220 basis points, to 27.7%.

Chipotle's former parent, McDonald's (NYSE: MCD  ) , also reported an amazing quarter yesterday. You could argue that Chipotle and McDonald's both provide food for bargain-hungry consumers, even if the type of food they sell differs greatly in perception.

There's no guarantee that every restaurant will outperform right now. Take Sonic (Nasdaq: SONC  ) , which reported a very disappointing quarter yesterday, complete with stomach-churning drops in earnings and revenue.

I'd also be wary of investing in pricier, sit-down restaurants in this penny-pinching consumer climate. Ruth's Hospitality (Nasdaq: RUTH  ) and McCormick & Schmick (Nasdaq: MSSR  ) both give me pause right now, as does online reservation company OpenTable (Nasdaq: OPEN  ) . With restaurants facing an ever-tougher battle to lure in customers, and investors must choose their stocks in that sector carefully.

Chipotle gives little reason for such caution, thanks to its strong quarterly results and superb operations. That said, investors should note that its price-to-earnings ratio does look high at 34 times earnings; one can snap up McDonald's for a far cheaper 18 times earnings.

Still, Chipotle's spicy growth and appetizing business concept might give investors good reason to choke down that premium price and bite into this very tasty stock.

Chipotle and OpenTable are Motley Fool Rule Breakers recommendations. Chipotle is a Motley Fool Hidden Gems pick. The Fool owns shares of Chipotle. 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 Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 23, 2010, at 12:44 AM, maximus9 wrote:

    Looks like the 'stuffing' is already baked into the stock price of CMG with the explosive post-earnings move today. Might be prudent to take profits and run. Come back another day to get back in the game around 150-160 range. The way I look at it, CMG may go up few more points at best but the potential and probability of a downward move could be much higher from this peak. Personally I would look for shorting opportunities here OR position a debit put spread.

  • Report this Comment On October 24, 2010, at 6:37 PM, CraigMiles wrote:

    Shorting sounds like a great idea.

  • Report this Comment On October 25, 2010, at 3:09 PM, tbwhite67 wrote:

    If you read the conference call transcript you would have seen that new restaurant openings are about to accelerate. The # of restaurants increased 7% in the first 3 quarters of 2010, they project to increase the restaurant count by 12% in Q4 2010 alone. So, as they run into tougher same store comps in the coming quarters they are positioned to provide growth from opening new locations. Not that there isn't risk in opening new restaurants, but if there is one thing CMG has proven they can do, it's execute.

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