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3 Reasons to Invest in Chipotle Mexican Grill

http://www.fool.com/investing/general/2014/02/10/3-reasons-to-invest-in-chipotle-mexican-grill.aspx

William Bias
February 10, 2014

Fast-casual Mexican restaurant chain Chipotle Mexican Grill (NYSE: CMG) possesses many qualities that could translate into long-term capital gains. The long-term potential of Chipotle also exceeds that of its competitors Yum! Brands' (NYSE: YUM) Taco Bell and Jack in the Box's (NASDAQ: JACK) Qdoba Mexican Grill. Here's why.

Do-good reputation
Even though it's hard to quantify, Chipotle executives feel that active engagement with its stakeholders, such as employees and customers, helps strengthen its overall brand and drives customer traffic.  Chipotle grooms its high-performing employees for promotion into leadership roles, giving everyone an incentive to perform highly in an effort to earn those promotions. In addition, when asked about the effects of a possible minimum wage hike, executives responded by saying it wouldn't affect them much because they already pay more than $9 an hour. 

Chipotle wants to make sure that customers get educated in its "do good" philosophy through creative means. In the most recent earnings call, company executives highlighted its "Scarecrow" marketing program, complete with an animated short film and mobile phone games. Chipotle also recently produced four 30-minute episodes of a comedy called Farmed and Dangerous that "explores the world of industrial agriculture in America." Company executives also underscored to analysts its intentions to eliminate GMOs from the menu. Other attempts at customer engagement include Sofritas, a vegan tofu proving popular among vegetarians and meat eaters alike. 

Solid fundamentals
Chipotle's engaging philosophy, perceived product quality, and expansion translate into top- and bottom-line growth. The company opened 185 stores last year. For 2013, company revenue and net income expanded 18% each. Chipotle's free cash flow expanded an impressive 48%. However, its margins suffered a little due to food cost inflation. Company executives will observe economic conditions throughout 2014 to determine the merit of a price increase in an effort to curb eroding margins.Chipotle sits on a pristine balance sheet with cash comprising 21% of stockholder's equity and possesses no long-term debt. 

Competition doesn't measure up
Success makes you a target and attracts competition. Qdoba Mexican Grill serves to compete directly with Chipotle; however, it struggles in the face of intense competition, which highlights Chipotle's strength and reputation. According to the latest figures, in 2013 Jack in the Box closed more Qdoba Mexican Grills than it opened, for a total net loss of 12 units. However, Qdoba signifies a bright spot for Jack in the Box, with Qdoba's company revenues expanding 22% last year.  Unfortunately, Jack In the Box, which competes in the crowded hamburger arena, saw its 2013 company revenues decline 10%, serving as a drag on overall revenue. The company's overall 2013 revenue declined 1% as a result. 

While both Chipotle and Qdoba exude a fast-casual feel, Taco Bell seeks to cater to the value-conscious fast-food consumer. In addition, Yum! Brands and its franchisees operate nearly 6,000 Taco Bell stores, compared to Chipotle's 1,600 stores, meaning Taco Bell has less room for expansion. Also, in contrast to Chipotle's transparent and sterling supply chain reputation, Yum! Brands' "poultry supply incident" in China KFCs last year probably still haunts the minds of some of its customers, giving them