Many local restaurants are still reeling from the global pandemic. However, many large-cap restaurant stocks have actually held up quite well, with some even up strongly for the year. This is because investors might think large, well-funded companies will take market share from small businesses, which are, unfortunately, still reeling from the pandemic.
Looking to invest along this theme? If so, you might be choosing between two of the biggest, best-run quick-serve restaurant chains in the industry: Starbucks (SBUX -1.02%) and Chipotle Mexican Grill (CMG 6.33%). But which is the better buy today?
Image source: Getty Images.
Weathering the pandemic
One main measure of the health in any retail business is comparable store sales, which shows the growth in existing restaurants compared with their performance in the year-ago period. Like all restaurant chains, both Chipotle and Starbucks took big hits in the second quarter, but each also improved over the course of April, May, then June.
In Q2, Starbucks saw U.S. same store sales fall a somewhat shocking 41%, as the quarantines in April hit the coffee chain hard. However, trends improved throughout the quarter. From down 43% in May, same store sales rebounded to down 19% in June. Management also guided U.S. same store sales would be down 14% in July, and that the current quarter would show same store sales down 12%-17%. International comps were slightly better, down 37%, with September quarter guidance for comparable sales improving to down 10-15%.
Meanwhile, Chipotle's comparable store sales numbers look much better than Starbucks'. For its second quarter, Chipotle recorded just a 9.8% decline in same store sales, much better than Starbucks' 41% U.S. decline. Moreover, Chipotle's comps even turned positive by June: The month-by-month comps trajectory for Chipotle was down 24.4% in April, down 7% in May, and up 2% in June. Moreover, Chipotle forecasts improving comps in July, with comps up 6.4% as of the company's conference call late in the month.
That could be attributed to several factors; one, Chipotle's meals can more easily be delivered than Starbucks, though both companies have that capability. Starbucks is also missing out on the crucial morning commute coffee run, which doesn't affect Chipotle as much.
On the other hand, that means Starbucks may spring back stronger once a vaccine is found, which could boost consumer discretionary spending.
As we'll see, valuation comparisons complicate the picture even further.
Neither is a bargain, but one is preferable
No doubt, both Starbucks and Chipotle will survive this crisis and continue pleasing their customers for years to come. Both companies saw their founders cede control to successors in recent years, but each transition has gone smoothly, with both stocks performing strongly before the pandemic.
Instead of looking at this year's numbers, which are bound to be skewed heavily by the virus outbreak, it may be a good idea to look at both companies' valuations as a multiple of both "pre-pandemic" 2019 earnings, as well as multiples based on "post-pandemic" analyst estimates for 2021.
|
Company |
2019 EPS |
P/E Ratio Based on 2019 EPS |
2021 EPS Average Estimate |
P/E Ratio Based on 2021 Estimate |
|---|---|---|---|---|
|
Starbucks |
$2.92 |
29.2 |
$2.68 |
31.8 |
|
Chipotle |
$12.38 |
104.8 |
$20.96 |
61.9 |
Data sources: company filings, Yahoo! Finance.
As you can see, Starbucks is expected to continue to struggle, still earning less in 2021 than it earned in 2019. Meanwhile, Chipotle is expected to improve by leaps and bounds, with earnings forecast to grow by almost 70% in 2021 versus 2019.
However, Chipotle's stock is also much, much more expensive, trading at a whopping 62 times even those rosy earnings forecasts.
Too rich for my blood
Both of these stocks look at a tad pricey to me at the current moment, but Chipotle is truly in a league of its own when it comes to expensive stocks. While Chipotle could still be a winning stock if it continues its high-growth path for many years, should the company run into any setbacks or slowdowns, as it did back in 2015, the stock could plummet.
Meanwhile, Starbucks isn't exactly a steal here, either. However, Starbucks' prospects in China should give it solid, if not unspectacular growth prospects over the next decade. Meanwhile, investors are paid a 2% dividend to wait for a recovery. Given that this long-term winner hasn't yet reached pre-pandemic stock price high, it's the current choice for me.
