There's something I find unique about eating food from Chipotle Mexican Grill (CMG 6.33%); its food seems to strike a balance between blend, taste, freshness, and convenience that's made it popular. Please don't take my word for it -- Chipotle's returned 3,100% since its IPO in 2006.
Chipotle's business might not knock your socks off with growth, and there's nothing about guacamole and grilled meat that someone else can't copy. However, it's a financial juggernaut that pumps out cash and still has a solid runway for expansion. Here's why Chipotle stock is one of the best restaurant companies you can put in your portfolio.
Generating enough cash for growth and buybacks
The restaurant business can be challenging. It relies heavily on manual labor, and you have little to no control over the costs of raw ingredients while your customers are constantly eye-balling your prices. That's why a company like Chipotle, with systems and supply chains, can have an advantage over the small business competition in a market.
Image source: Getty Images.
Chipotle's business generates strong cash flow, doing $959 million in operating cash from $7.2 billion in total sales over the past 12 months. Unlike McDonald's, Chipotle owns all of its stores, and sells franchises to restaurant operators. One business model isn't necessarily superior to the other, but owning the restaurant gives Chipotle more control over all aspects of the business.
The company steadily opens up new locations, which requires investments in people and equipment. It averages between 40 and 50 restaurants per quarter. Chipotle's generated $511 million in free cash flow over the past 12 months after accounting for these investments, giving it the ability to buy back shares.
Its total number of outstanding shares has fallen from 32 million in 2011 to 29 million today, retiring just over 9% of shares. Buybacks help drive per-share metrics like earnings per share (EPS) because the company's profits are spread across fewer shares of stock.
Strong digital business
A company's ability to adapt to new trends and consumer tastes can be a sign of solid management. The rise of food-delivery services like Uber Eats and DoorDash have shown how popular food-delivery services have become among consumers, especially since COVID-19 has made it harder to dine in.
Chipotle has a smartphone app where customers can join a loyalty program to receive rewards and order food for pickup or delivery. It also partners with third-party food delivery companies.
Digital sales were 42.8% of Chipotle's revenue in its most recent quarter, third-quarter 2021, and grew 8.6% year over year. The company's loyalty program boasts 24.5 million members. Management has said that this user base gives them data to personalize marketing to new customers or those who haven't purchased in a while.
Long runway for expansion
Chipotle's growth runway seems relatively large, thanks to its modest store count and global footprint. It currently operates 2,892 restaurants across the United States, Canada, and the United Kingdom; all but 37 are in the U.S.
Coffee chain Starbucks, another restaurant that owns its stores, has more than 30,000 locations worldwide. It's not a direct comparison to Chipotle, but I think it shows what the long-term potential could be. It's probably fair to say that coffee chains are easier to find locations for than Mexican fast food. Still, at the very least, I think Chipotle can open 100 to 200 stores per year for the foreseeable future without things feeling crowded.
Is the stock a buy today?
The company's cycle of generating cash, opening stores, and buying back shares should continue moving forward. However, valuation remains an essential part of investing in a business like Chipotle because the stock could take a while to grow into an overly pricey valuation.
CMG PE Ratio (Forward) data by YCharts
Fortunately for investors looking to buy shares, the stock has fallen more than 25% from its 52-week high. The stock's forward price-to-earnings ratio is 43, its lowest since the pandemic began. At the same time, analysts are bullish on Chipotle's future earnings potential, with EPS growth estimates trending higher. In other words, the stock is getting cheaper while the company's performance could improve.
Chipotle's ability to grow at a steady rate and produce enough cash flow to expand and buy back shares is a big reason the stock has been such a big winner over the years. Sometimes if it isn't broken, don't change things, and Chipotle seems poised to continue winning for investors over the years ahead.
