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Better Buy: Nike vs. Chipotle

By Neil Patel - Mar 16, 2021 at 7:28AM

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With both companies humming along, investors are presented with a tough choice.

Investing in either Nike (NKE 4.55%) or Chipotle Mexican Grill (CMG 3.06%) stock a year ago would've been a fruitful endeavor.

In the time since the coronavirus pandemic became a national emergency, the global sports apparel giant is up 116%, while the fast casual restaurant chain has rallied 158%. These figures suggest a bright future for both businesses, as optimistic investors put the health and economic crisis in the rearview mirror.

Which consumer discretionary stock is the better buy today?

man with hands on hips looking at screen with buy and sell arrows

Image source: Getty Images.

The case for Nike

Nike's Consumer Direct Acceleration initiative, which was announced last June, is the company's bold plan to unlock long-term growth and profitability using technology. It's been working so far, as digital sales climbed 84% in the most recent quarter, while overall revenue increased 9%.

The Swoosh has always emphasized adopting technology to enable a greater connection with its consumers. The pandemic just brought it front and center. Nike added 70 million rewards members since the pandemic began, and its SNKRS app continues to be a competitive strength that's fueling consumer engagement with its popular product drops.

With the sports world slowly returning to normal, expect Nike to spend more on "demand creation" expense, which includes costs for branding and sporting events. And inventory levels have also stabilized and returned to normal levels. These developments will ensure the Nike brand remains in a powerful position.

Management is still confident in its long-term financial targets, forecasting high-single-digit revenue growth and mid-teens EPS growth. Even more impressive is the commitment to keeping return on invested capital above 30%, a number that demonstrates Nike's strong competitive advantage.

Investors willing to pay a reasonable 47 times next year's earnings have the chance to buy an industry-leading company that has raised dividends for 19 straight years. Additionally, Nike still has $11 billion in capacity remaining under its 2018 share repurchase program, something management will resume when it's appropriate.

The case for Chipotle

Similar to Nike, Chipotle depended on its technological aptitude to navigate the pandemic. Digital sales in 2020 soared 174.1% versus the prior year, and accounted for 49% of all business in Q4. Even with in-person dining restricted, the delivery-friendly nature of Chipotle's menu items supported the company during a turbulent time.

Nearly one quarter of Chipotle's revenue comes from delivery now. Although this can add incremental sales for a restaurant struggling to grow, it's actually having a negative impact on Chipotle as third-party delivery partners' fees eat into margin. This has resulted in the company raising prices of its menu items by 13% if customers order by delivery. As indoor dining slowly opens back up, delivery sales could drop off, which will help boost profit.

Chipotle opened 161 new stores last year, bringing the total count to just under 2,800. But management thinks that there is potential for 6,000 worldwide. If Chipotle even remotely approaches this ambitious target, then sales and net income will skyrocket, taking the stock price along with it.

Investors wanting a piece of the action will have to pay a forward P/E of 63, much higher than Nike, but possibly warranted if the expansion goal is met.

The winner

Nike and Chipotle are successful businesses selling products that consumers absolutely love. Even a global pandemic and sharp economic decline that characterized 2020 didn't do much to derail the prospects of these companies.

It's obvious that both Nike and Chipotle will lean heavily on their digital capabilities to drive growth going forward, something that will further entrench their competitive positioning and keep competitors at bay.

Therefore, I think the better buy here is purely based on your own temperament and risk tolerance. If you prefer safety and stability, go with Nike. But if you're willing to pay up for greater growth potential, choose Chipotle. Both stocks can be a wonderful addition to any long-term portfolio.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
$112.91 (4.55%) $4.91
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,329.02 (3.06%) $39.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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