Whenever you see a stock that doubles in a year, you know that the doubters are going to come out in droves. Admittedly I've been one of those naysayers who doubted Chipotle Mexican Grill (CMG 0.04%) in the past. However, when you look at the company's recent performance compared with its peers, it's clear that there is something different about this company.
I've never been there, and I don't like the stock
One of the worst things an investor can do is try to judge a company with no direct experience of the concept. Peter Lynch used to say that he liked following restaurants because the business was relatively easy to understand. He said that as long as same-store sales were increasing and the company was following a reasonable plan for growth, that it usually pays to stick with the stock.
Lynch would be impressed with Chipotle's ability to outperform many of its restaurant peers. In the quarter just ended, the chain reported revenue up 18 % and diluted earnings per share up 17%, on the back of an impressive 6.2% increase in same-store sales.
Many investors make the mistake of comparing Chipotle to fast-food chains like McDonald's or Jack in the Box, which owns Qdoba . The problem with these comparisons is that Chipotle has an almost cult-like following and with respect to McDonald's, the food quality couldn't be more different.
A fairer comparison might be companies that are expected to post earnings growth in the same neighborhood as Chipotle. Two chains that seem to be natural peers are Panera Bread (PNRA +0.00%) and Buffalo Wild Wings (BWLD +0.00%). With both of these chains expected to grow EPS by at least 17% in the next few years, they provide better comparisons to Chipotle than companies that are expected to grow much slower.
When you consider that Panera saw same-store sales increase by just 1.2 %, and Buffalo Wild Wings reported roughly 4% same-store sales growth , you can see how impressive Chipotle's more than 6% increase really is.
What is even more distressing is when an analyst or investor says they have never been to a Chipotle , but they know the company. In this case, if you haven't seen first-hand the speed with which Chipotle moves customers in and out of the door, and tasted the food, you don't know this company.
Speed, spice, and service
The name of the game at Chipotle is speed. The chain doesn't mess around with high-end fixtures, they don't always have tons of seating, but they do get customers their meals quickly.
This speed helps explain why the company carries a greater than 16% operating margin, while Panera manages just over 11%, and Buffalo Wild Wings can't hit 8%. As you might imagine, the design of Chipotle lends to a lower staffing requirement than companies like Panera or Buffalo Wild Wings.
Certainly a major factor that helps with Chipotle's higher margin is the fact that the company spends significantly less on labor. With food prepared in an assembly line fashion and a relatively small cooking staff, each restaurant needs fewer people to run. Panera and Buffalo Wild Wings need many more people to do the food prep.
In Buffalo Wild Wings' case, waiters and waitresses are an expense that neither Chipotle nor Panera Bread has to deal with. In fact, in the recent quarter, Chipotle spent just under 23% of revenue on labor expenses. Panera and Buffalo Wild Wings came in at more than 26% each.
What's next?
Investors got understandably excited when Chipotle announced that it planned on a price increase next year . In fact, this excitement has been part of the reason why Chipotle sits near its 52-week high.
The company currently projects new store growth of at least 10% next year combined with single-digit comps (excluding price increases). If Chipotle's price increase leads to better than single-digit comps, the company's top-line growth could continue rolling along in the mid-to-high teens.
The challenge with buying Chipotle for most people today is the stock's price. At just over 50 times expected EPS for the full year and over 40 times next year's projections, the stock isn't cheap. However, the company's reasonable growth plans, strong comps, and ultra-efficient operations are all reasons to consider the stock.
While buying on a dip might sound like a good idea, this stock doesn't dip often. Investors who are afraid of paying a premium for arguably the industry's best chain could be the ones left holding the bag.
