Amid a possible bull market, the recent IPO of Cava Group has brought attention back to the fast-food industry. Many regard this newcomer as the Mediterranean version of Chipotle Mexican Grill (CMG 0.90%) and hope that it can match Chipotle's long-term returns.
Yet, one might argue, why take a risk on Cava when investors have an established success in Chipotle? And despite Chipotle's massive footprint, its store growth is not likely to end soon. Three reasons explain why Chipotle still looks like a good investment today.
1. Chipotle's approach to food
Chipotle succeeds partially because it offers healthy food in a fast, casual setting. It makes its dishes with naturally produced ingredients and bans the use of freezers and can openers, which appeals to health-oriented consumers who might otherwise choose Cava.
But unlike Cava, it has leveraged a more popular food type. Indeed, the Mediterranean food served by Cava has attracted a growing following. However, Mexican food has long been one of the most popular food choices in the U.S., according to Google search data. When combining that popularity with healthy ingredients, competitors like Cava might struggle to match its success.
2. Strong pricing power
Indeed, economic uncertainty is a negative for the restaurant industry as rising prices have consumers scrambling for lower-cost meal options. But while that challenge may hurt other restaurants, it appears to help Chipotle. For one, it is still possible to order a burrito at Chipotle for under $10.
Also, amid the rising cost of food inputs and labor, Chipotle steadily increased prices last year. That move has not significantly slowed its sales. In the first quarter of 2023, revenue increased 17% to $2.4 billion, which included an 11% increase in comparable restaurant sales. Also, adding 210 stores over the previous year boosted revenue. Chipotle operated more than 3,200 locations as of the end of Q1.
That growth has likely helped to boost Chipotle's stock. Over the last year, it has risen more than 60%. And while its P/E ratio of 57 makes it on the pricier side, the stock has not often fallen below 50 times earnings over the last five years. Hence, as long as it can maintain its growth rate, it can easily maintain that earnings multiple.
3. Room to expand
Moreover, nearly all of its restaurants are in the U.S., and new investors will like that its 3,200 locations do not represent a saturation point. In fact, the company believes it can grow to 7,000 U.S. locations since it needs a population base of approximately 40,000 to support a location. Consequently, Chipotle locations have become increasingly prevalent in non-metro areas.
Furthermore, it has only a few locations abroad. In Canada, it operates only 34 restaurants, all of which are in Ontario and British Columbia. Canada's population is about 11% the size of the U.S., indicating that it could support several hundred locations.
Additionally, Chipotle has only a few restaurants in Europe, including 13 in the U.K. It may be a little early to gauge Chipotle's potential in Europe, but if it could replicate the success of McDonald's or Starbucks in that region, it points to considerably more possible growth.
Consider Chipotle
Although Chipotle appears to have some competition in Cava, investors still have good reasons to stay with the larger fast-food stock. Chipotle's popularity has been repeatedly proven despite rising prices. And as more investors return to the market, its stock price could continue moving higher.
Meanwhile, the fast-food giant continues to expand across the U.S. at a rapid pace. And assuming it can add locations in Canada and Europe successfully, it could keep that expansion going for decades.