Looking for the "next big thing" can take you down a rabbit hole. But sometimes, you don't need to find a cutting-edge, complex, or speculative stock to generate strong investment returns.
Casual Mexican restaurant chain Chipotle Mexican Grill (CMG +0.91%) sells burritos, bowls, and salads from over 3,000 stores in the United States, Canada, and Europe.
There's nothing about beans, rice, and guacamole that others can't replicate, so how has Chipotle thrived since its founding in the 1990s? More importantly, what does the future hold for investors? The answer lies below.
Image source: Getty Images.
Execution excellence
The restaurant business is tricky; roughly 60% of them close their doors before their first anniversary. There isn't anything proprietary about hamburgers, coffee, or burritos, but companies like Starbucks, McDonald's, and Chipotle keep growing. Why? It boils down to solid brands and ruthless execution. Once a company builds a system to replicate what works, it's just a matter of "rinse and repeat."
NYSE: CMG
Key Data Points
Judging by its success, Chipotle has seemingly built a positive reputation among its customers for good-tasting food with fresh ingredients at an affordable price. It owns its stores, supporting them with buying power on ingredients and logistics that get stronger as the company builds more stores. This "system" lowers its costs, and local restaurants can struggle to compete.
CMG Revenue (TTM) data by YCharts.
You can see in the above chart how revenue and free cash flow have steadily grown almost like clockwork for more than a decade, aside from the company's infamous E.coli outbreak in 2015. The company has developed sales by an average of 13% annually over the past decade; despite COVID-19, annual growth has accelerated to almost 16% over the past three years.
Massive growth runway
Restaurant companies always want to grow same-store sales, and Chipotle is doing that; same-store sales rose 9% year over year in Q1 2022. However, increasing the number of restaurants is low-hanging fruit that can drive years of revenue growth for investors.
Chipotle has just over 3,000 stores companywide. There is so much room for growth in domestic and foreign markets. Starbucks has more than 32,000 stores, and McDonald's has more than 38,000. That's not to say that Chipotle is bound to have that many, but with food that has a potentially multicultural appeal (who doesn't like beans and rice), is it a stretch to see a company with 15,000, 20,000, or more stores down the road? I don't think so, though that's probably at least several years away.
The company is opening between 40 and 80 restaurants each quarter on average, so if you're looking at Chipotle as a long-term investment, there's easily room for a decade or longer of steady openings that can drive sales growth. The more stores, the more revenue, the more cash flow, and the more share repurchases to help grow earnings-per-share (EPS). As I said, it's a system of success.
Paying up for quality
The stock is currently down almost 30% from its high but has still been a massive long-term winner. A $10,000 investment at the company's IPO in 2006 would be worth more than $315,000 today!
CMG Total Return Price data by YCharts.
Quality stocks aren't often trading at bargain-basement valuations, which seems to be the case here. Analysts have full-2022 EPS slated at $32, putting Chipotle at a price-to-earnings ratio of 43.
That's certainly not cheap for a business growing sales and EPS by 12% to 13% each year. Warren Buffett once quipped that great companies bought at fair prices are better than bad stocks at low prices.
I hope I've successfully argued that Chipotle is a quality stock, but is the price fair? That's up to the investor; a long-term outlook and a dollar-cost-averaging strategy can help ensure investors get a fair shake at owning a quality stock like Chipotle. Sometimes if you wait for the "perfect" price, it never comes! If the share price does keep falling, investors can get a little more aggressive.
