One of the greatest restaurant stocks ever is Chipotle Mexican Grill (NYSE:CMG). It only went public in 2006, which is relatively recent. But it's still enough time to have earned you a small fortune with a $10,000 investment, as we'll see.
For most of us, $10,000 isn't pocket change. According the Transamerica Center for Retirement Studies, members of Generation X have saved an average of $64,000 for retirement. Baby boomers have more with $144,000. Therefore, a $10,000 investment for these generations would represent 16% and 7%, respectively, of their overall retirement savings on average.
This level of investment should be reserved for only your highest-conviction choices. Was there enough information about Chipotle in 2006 to give investors that level of confidence? Yes, I believe there was.
The right ingredients
Pattern recognition is crucial when investing in stocks. Market-beating investments often display the same characteristics, giving in-the-know investors an edge for identifying tomorrow's winners. With food service, winning companies are often aggressively expanding, profitable early, and consistently growing comparable-store sales. That's certainly true of other long-term winners like Domino's Pizza, Wingstop, and Starbucks.
Chipotle was profitable early. It lost $7.7 million in 2003 as it expanded from 227 locations to 298 locations. But that was the last year it posted a loss. It earned $6.1 million in 2004, and $33.4 million in the first nine months of 2005 -- the most up-to-date results for IPO investors.
It was also expanding at a blistering pace. Chipotle opened 80 new locations in 2005, growing 20% year over year from the 401 it had at the end of 2004. And it planned to open 80 to 90 new restaurants in 2006, good for another 17% to 19% unit growth. The company would wind up overachieving on this lofty IPO guidance by opening 94 company-owned restaurants that year.
Finally, Chipotle was consistently growing comps. From 2002 through 2005, comps grew by double digits annually, including an impressive 24% in 2003. Comps growth is important because it can boost restaurant profitability by leveraging things like labor and occupancy expenses. Indeed, as a percentage of revenue, labor and occupancy costs both decreased from 2002 to 2005.
These three ingredients are a winning recipe with restaurant stocks, and good reason to have bet big on Chipotle's 2006 IPO. But it wasn't without risk.
An old red flag
It might be hard to remember, but McDonald's still owned about 88% of Chipotle right after its IPO. As a small company, Chipotle benefited from the fast-food giant's massive operations. Consider this excerpt from Chipotle's prospectus: "McDonald's relationship with Coca-Cola has helped us contain our beverage costs, and we've relied on the McDonald's distribution network."
McDonald's planned on selling some or all of its stake in Chipotle after the IPO, ending the business relationship. Chipotle undeniably benefited from riding on McDonald's coattails, and it was fair to wonder if expenses, especially food-related costs, would climb once it was no longer a McDonald's subsidiary.
It wasn't long before McDonald's completely divested its stake in Chipotle. But the burrito chain was fine. In 2007, its first full year back out from under McDonald's, its food, beverage, and packaging costs barely increased. As a percentage of revenue, this line item only increased half a percentage point compared to 2006.
In reality there's always a risk with investing. But I probably wouldn't have bought Chipotle's IPO because of the unknowns with this risk factor. After a year, however, it should have been clear this risk was minor compared with the reward awaiting those willing to buy for the long term.
How much reward?
Chipotle's IPO was priced at $22 per share, but closed its first day of trading at $44 -- exactly 100% higher. If you invested $10,000 at the IPO price, you could have purchased 454 shares. Over the years, the stock hasn't split or paid a dividend, so calculating the value of the investment is easy. At its current share price of around $1,115, your stake would be worth about $506,000 -- a half of a million bucks.
Investing legend Warren Buffett says: "Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." Chipotle was one of those infrequent opportunities worth betting big on, and those who did have been richly rewarded. That said, this company's cash flow keeps getting better with time and can still reward investors who buy shares today.