As the COVID-19 pandemic swept across America and lockdowns began hammering the economy, Chipotle Mexican Grill (CMG 0.41%) managed the situation better than many of its restaurant sector peers. By early May 2020, its stock price was already trading above its pre-pandemic level, and it nearly doubled that value by February 2021.
While its stock still trades near record highs, Chipotle may be losing momentum. Beyond Meat (BYND 0.57%), however, appears to have more upside and could be worth a look as a strong food sector alternative.
Why is Chipotle's growth slowing?
Despite several stock price spikes this year, including a current one that started in late June, Chipotle's share price hasn't broken above the $1,525 to $1,575 range. Each of 2021's two previous peaks was followed quickly by a stock price slump. Could the restaurant chain's stock price be reaching the limit of valuation justified by its performance?
Image source: Chipotle.
The stock price growth has definitely outpaced revenue and earnings growth. Chipotle's current stock value is up about 51% in the past year and 114% over the past two years. Revenue for the first quarter of 2021 is up 23.4% year over year and up roughly 30.8% from Q1 2019's pre-pandemic revenue. Thus, its share price grew 2.2 times faster than revenue over the past year, and 3.7 times faster over the past two years.
Turning to the bottom line, Q1 adjusted quarterly earnings per share (EPS) were $3.40 in 2019, $3.08 in 2020, and $5.36 in 2021. EPS rose 57.6% over the last two years, an impressive achievement but only around half of the 114.3% share price growth.
Other metrics show Chipotle's performance and value approaching that of long-established companies. Back in 2019, Chipotle's price-to-sales ratio was 4.39, compared to P/S ratios from McDonald's of 7.29 or Yum! Brands' 5.82. Back then, investors were only willing to value the company at $4.39 per dollar of sales, likely undervalued compared to other major fast-food chains. That gap is shrinking in 2021, with Chipotle's 6.92 P/S ratio approaching McDonald's 8.81 and surpassing Yum!'s 6.03.
Forward price-to-earnings ratio, or forward P/E, also highlights Chipotle as certainly not undervalued, and perhaps even overvalued. Chipotle's forward P/E is 62.9 according to Yahoo! Finance data, compared to Yum!'s 28.5 and McDonald's 26.9.
Chipotle's major swing into digital sales (now more than 50% of its sales) may justify some additional valuation. But a forward P/E valuation more than twice that of other large, successful restaurant companies suggests that the stock is already priced for perfect performance with potential for volatility if its growth doesn't continue at its current pace.
Furthermore, Chipotle has no dividend while many of its big competitors in the restaurant sector do, a factor counterbalancing some of its valuation advantages.
Why Beyond Meat could go above and beyond
When it comes to Beyond Meat, naysayers of the plant-based meat maker are even more vocal in predicting its doom lately. But Beyond Meat shows no more signs of dying than electric vehicle company Tesla, another maverick company that regularly defies its detractors.
One argument against Beyond Meat suggests the plant-based burgers, which contain lots of salt and carbohydrates, aren't much healthier than their real beef counterparts. This misses the point of its faux meats, which are more about environmental concerns and/or the ethics of eating animals. The company claims its product is "greener" than real meat, cutting energy use by 46%, greenhouse gas emissions by 90%, and land use by 93%. It also says its faux meats improve animal welfare.
Image source: Getty Images.
Beyond Meat has benefitted from a first-mover advantage and is the highest-profile name in the plant-based meat industry. Its avoidance of soy and genetically modified organisms (GMOs), creation of a meat-like eating experience, and ongoing research and development program all give it some mystique similar to that of Tesla, which continues to dominate the North American EV market despite many other traditional car companies also venturing into the electric field. Tesla demonstrates the market power of a bold, high-visibility brand, and Beyond Meat is trying to duplicate that success.
Some would argue that Beyond Meat's ongoing and increasing research expenses (37% of net revenue in Q1 2020 versus 53% in Q1 2021) weigh on its bottom line. But this is a positive development as innovation in these areas is key to winning new customers and retaining existing ones. This is because the increased expense "primarily reflects a significant increase in production trial activities; increased headcount levels as we continue to build out our R&D capabilities and support our international expansion plans," according to executive statements on the Q1 earnings conference call.
While the expenses are relatively high, they represent a direct investment in Beyond's future success, with both research and international expansion representing future drivers of growth. In March of this year, Beyond Meat trademarked the phrase "Beyond Cheese," signaling a likely move into dairy, potentially including advanced cheese, milk, and egg substitutes and entering a whole new sector of the market.
Beyond Meat is currently burning cash thanks in part to its investment in R&D and its expansion strategy, but only at a trailing-12-month (TTM) rate of $53.5 million per quarter in operating cash flow. With $1.125 billion in cash and cash equivalents, this would be enough for more than five years of operation. Obviously, Beyond is aiming to become profitable sooner than this, but the metric provides a baseline showing the company will not run out of cash to continue operations anytime soon.
Image source: Beyond Meat.
Meanwhile, Beyond is growing its revenue, with sales up 11.4% year over year for Q1 2021. Retail sales are up strongly for the quarter, rising 27.8% in the U.S. and 189% abroad. Revenue growth has been slowed a bit by foodservice sales still being affected by ongoing COVID-19 restrictions in some locations. Consumer net revenue in Q1 jumped 45% year over year while foodservice net revenue fell 34%, although CEO Ethan Brown said foodservice is "showing directional early signs of recovery."
In June, Beyond Meat partnered with food delivery service DoorDash to deliver summer grilling kits and Beyond Meat products are now available in more than 2,500 additional stores in Australia.
Investor takeaway
While stock price hinges on more than top- and bottom-line success, the metrics suggest Chipotle's impressive revenue and earnings growth are likely already priced into the current share value. This isn't to say Chipotle is a bad stock to own, that the company is poorly run, or that it won't grow more eventually. But it may be at or near the top of a bull run and thus likely to generate more modest gains for the next few years.
Beyond Meat, on the other hand, has been operating within a (highly volatile) sideways channel for about a year. With its retail sales still gaining steadily, its foodservice sales likely set to rebound, and its investments in innovation, expansion, new partnerships, and capacity all ramping up, Beyond Meat looks poised to start another bull run. This could be a good entry point for those interested in food stocks.
