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This Restaurant Stock Could Be Poised for a Chipotle-Like Breakout

By Jeremy Bowman - Nov 14, 2019 at 11:51AM

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Find out why this fast-casual chain could be set to soar.

Chipotle Mexican Grill (CMG 1.48%) shares have cooled off a bit since the fast-casual chain's third-quarter earnings report, but the stock has still nearly tripled since February 2018.

The surprising comeback came under new CEO Brian Niccol, who capitalized on digital ordering through the Chipotle app and website, and third-party delivery through apps like Doordash, to deliver a boom in sales. In the most recent quarter, comparable sales jumped 11%, driving adjusted earnings per share up 78%.  Those kinds of results have made investors forget about the E. coli scandal that sunk the stock a few years ago, and they have pushed the stock up past its former heights, indicating they're more optimistic about the company than ever.

However, with the stock trading at a price-to-earnings ratio close to 60, Chipotle's recent rally may be exhausted, but the company has left a clear blueprint for other restaurant chains to follow. Keep reading to learn about one undervalued restaurant stock that could be set to follow in Chipotle's footsteps.

A meal, including a burger, fries, and a drink, on a tray at a Habit restaurant

Image source: Habit.

Introducing Habit Burger

Habit Restaurants (HABT) isn't a newcomer on the stock market. The fast-casual burger chain went public five years ago and has slumped following a short-lived pop. For most of the last two years, it's traded around $10 per share.

However, there are signs the company is turning the corner. The stock popped 16% on its recent earnings report as comparable sales rose 3.1%, and it beat estimates on both the top and bottom lines. Considering how far the stock has fallen since its IPO, shares would triple just by recovering their losses. By comparison, Habit's price-to-sales ratio is much lower than Chipotle's, at 0.5 versus 3.9 for the burrito roller, and there are several signs that Habit is embracing a similar strategy, which could help give the stock a richer valuation. 

The burger flipper is increasingly leaning on the digital channel to drive sales. In the third quarter, the company shared on its earnings call that sales through its digital platforms were up 26%. At Chipotle, digital sales jumped 88% in the third quarter and now make up 18% of total sales. Habit is just starting to invest marketing dollars in its digital channel to boost app downloads, much like Chipotle has done, so growth in digital may just be starting to ramp up. It only launched its new mobile app in July.

Management also said that delivery sales more than doubled over the last year, and the company expects that growth to remain strong as it recently added Uber Eats as an additional partner. 

Finally, the company is also investing in convenience inside the restaurant as well, again mirroring Chipotle's recent move with "Chipotlanes," its take on a drive-thru. Habit said it would put self-order kiosks in all of its new and remodeled restaurants, and it's aggressively adding drive-thrus, saying the format would be part of at least half of its new restaurants. Currently, about 20% of its store base has a drive-thru.

Though Habit's drive-thrus aren't set up for digital order pickup the way Chipotlanes are, Habit management is open to that idea as digital ordering grows more popular.

A man punching numbers on a calculator and looking at charts

Image source: Getty Images.

Do the numbers add up?

Though Habit's experience on the public markets has mostly been frustrating for investors with little in the way of comparable sales or profit growth, the business looks more promising according to other industry metrics. For instance, average unit volume at Habit is $1.89 million, modestly below Chipotle's at $2.15 million. A year ago, before Chipotle began to ramp up its recent changes, its average unit volume was $1.98 million. 

Habit's restaurant-level operating margin is on track to be nearly 17% this year, while Chipotle's reached 20.8% in the third quarter, up from 18.7% a year ago. Habit is also growing its restaurant base by about 10% a year, faster than Chipotle on a percentage basis, and Habit has much fewer locations than the burrito giant: 265 compared to 2,546.

Based on those numbers, the potential very much seems there for Habit to evolve in a Chipotle-like business, as it would only need to modestly improve restaurant-level margins in average unit volumes, but it will take more than potential for the stock to surge. Management has to capitalize on the digital opportunity and convert sales into profits. 

Habit's food already has a strong reputation, and its burgers are acclaimed by a variety of publications, and since its food is made to order, the product seems like a natural fit for digital ordering as customers can avoid the usual six-minute wait.

The opportunity is there. It's time for management to execute.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,307.26 (1.48%) $19.06
The Habit Restaurants, Inc. Stock Quote
The Habit Restaurants, Inc.

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