Investors looking to put money to work in the competitive restaurant sector definitely have numerous options. But there are two businesses that stand out from the crowd.
I'm talking about Chipotle Mexican Grill (CMG 0.47%) and Starbucks (SBUX -0.31%). These industry leaders have many favorable traits that investors will find compelling. So, which one of these two restaurant stocks is the better buy right now? Let's see.
The case for Chipotle
Investors will find no shortage of reasons to appreciate Chipotle, the dominant fast-casual pioneer that is experiencing strong momentum right now. For starters, the business is reporting superb financials. Revenue increased 14.3% last year, while net income soared 36.7%. This outstanding performance is in the face of ongoing economic uncertainty.
Key to Chipotle's success is the value customers feel they get. The business claims that compared to rivals in the fast-casual space, it's 15% to 30% less expensive. Moreover, consumers from households of all income levels are showing solid demand.
On the 2023 fourth-quarter earnings call, CEO Brian Niccol said, "We will also further strengthen our industry-leading value proposition, which consists of delicious culinary, made with real ingredients, that is customizable, convenient, served quickly, and an accessible price point."
As inflation affected the business, leading to higher prices for crucial inputs like proteins, avocados, and paper products, Chipotle had no problem raising menu prices multiples times. Given the impressive same-store sales gains, consumers haven't been discouraged from continuing to order the company's popular burritos and bowls.
According to management, Chipotle has a long growth runway in the years ahead. Niccol believes there will be 7,000 locations one day in North America, double the current footprint.
Should these forecasts become a reality, it might not be that long until Chipotle is raking in $28 billion in annual sales. That would be 183% higher than the total for 2023. Growth-oriented investors won't hesitate to scoop up the stock.
The case for Starbucks
There aren't many brands as powerful as Starbucks, the key source of its economic moat. And it's what encourages consumers to pay premium prices for food and beverages that are really just commoditized products. That pricing power has resulted in strong profitability. In the past 10 years, the operating margin has averaged a superb 14.8%. This has allowed management to return lots of capital to investors.
In fiscal 2023 (ended Oct. 1), Starbucks repurchased $984 million worth of outstanding stock and paid $2.4 billion in dividends. The current dividend yield of over 2.5% might be enticing for income-seeking investors.
Although there are already nearly 39,000 Starbucks locations scattered across the globe, the growth story is far from over. Management set a target to have 55,000 stores open by 2030. While a lot of expansion is set to occur in China, the company plans to open more than 3,000 new stores in the U.S. alone over the long term. This outlook should keep shareholders happy.
The business isn't posting nearly as great financial results and growth as Chipotle is, but the coffeehouse chain does win in one important area: valuation. As of this writing, Starbucks sells at a price-to-earnings (P/E) ratio of 24. Chipotle, on the other hand, goes for a P/E of 65. To be fair, the Tex-Mex chain undoubtedly has better growth prospects.
Still, I don't think Chipotle's store-opening plan justifies the current rich valuation.Therefore, because Starbucks trades at a significantly lower P/E, I believe its stock is the smarter buy right now when compared to Chipotle.
