When you're thinking about places to invest capital, the restaurant sector might not be the first choice. It's not as sexy of an area as cutting-edge tech companies that might offer the promise of better growth. However, Chipotle Mexican Grill (CMG 0.40%) stands out as a thriving enterprise among its peers, as the stock is up an incredible 442% over the past five years, as of April 21.
Even Warren Buffett, who has some experience allocating capital into restaurant stocks, can appreciate this magnificent business. Despite the steep valuation that shares currently trade at, a price-to-earnings multiple of 56, here are three reasons the Oracle of Omaha would love Chipotle stock.
1. Chipotle has a strong brand
As of Dec. 31, 2022, Berkshire Hathaway's public equities portfolio was valued at $344 billion. And this portfolio is full of companies that have strong brand recognition, including Apple, American Express, and Coca-Cola. Chipotle might be in this category, as it's certainly a household name.
According to Piper Sandler's latest spring 2023 Taking Stock With Teens survey, Chipotle was ranked as the third most popular restaurant among the nearly 6,000 U.S. teenagers polled. Only Chick-fil-A and Starbucks were more favored by the Generation Z.
Bolstering Chipotle's brand status is its focus on high-quality, freshly prepared food. The Humane Society's Industry Scorecard, which looks at how different food companies treat the animals in their supply chains, ranked Chipotle as the second best with an "A+" grade, only behind Amazon's Whole Foods Market.
Being the pioneer of the fast-casual category has also helped. And Chipotle has registered impressive growth. Its store count of 3,187, as of Dec. 31, is up from 2,408 just five years earlier, with revenue up 93% during the same time. This success has spawned other fast-casual restaurant chains that have copied Chipotle's model, like Cava and Sweetgreen.
2. Chipotle has pricing power
In Buffett's view, the mark of a truly outstanding enterprise is one that can consistently ask its customers to pay more over time. "If you have to have a prayer session before raising the price by 10%, then you've got a terrible business," he once said. If a company can increase prices, it must be offering something that customers really value and can't get anywhere else.
Chipotle absolutely shines in this regard, especially over the past couple of years. Inflationary pressures have hurt the business, with costs being higher for labor, dairy and paper products, and some proteins. Management handled this situation by passing on higher costs to customers. In the fourth quarter, menu prices were up 13.5% year over year. This move helped expand the operating margin in 2022 to 13.4%, compared with 10.7% in 2021.
CEO Brian Niccol still highlights how great of a value Chipotle is to the consumer. And a recent survey found that just 7% of respondents agreed that Chipotle's prices weren't reasonable for the meal and service received. That bodes well for future menu price increases.
3. Chipotle prioritizes the customer
No business can create a powerful brand or possess proven pricing power without obsessing over the customer. As I noted, Chipotle's rapid store growth and focus on quality ingredients has helped expand its reach and win over customers. But it's hard to ignore the company's digital push in recent years that has strengthened its customer mindshare even more.
In March 2019, Chipotle launched its loyalty program. And at the end of last year, it counted 31.6 million active members. For comparison's sake, Starbucks, widely considered to be the gold standard restaurant chain when it comes to incorporating technology into its operations and offering a slick mobile app, had 30.4 million active members in the U.S. as of Jan. 1, 2023.
This digital push increases access and convenience for the business's hungry customers, while providing Chipotle with a valuable channel to collect data and drive engagement. Moreover, the popularity of the drive-through locations, called Chipotlanes, of which the company has 571, can further reduce friction for consumers looking to order.
These three important factors would definitely make Buffett love Chipotle. However, investors should wait for a better entry price before scooping up shares.
