Please ensure Javascript is enabled for purposes of website accessibility

Why Chipotle Mexican Grill Stock Looks Like A Great Long Term Investment

By Jeremy Bowman - Oct 17, 2014 at 10:52AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The burrito roller has had its ups and downs on the stock market, but the company should be a winner over the long haul. Here's why:

Chipotle Mexican Grill's (CMG -0.04%) price tag may scare off some long-term investors. After all, at a P/E of 57 and a valuation of $20 billion, the stock isn't cheap. But profits are soaring at the burrito roller, and when it reports third-quarter results on Monday, earnings per share is expected to pop 44% to $3.83. And while that growth is certainly impressive, Chipotle's prospects look just as bright over the long haul. Here are a few reasons why:

No franchising, no debt
McDonald's (MCD 2.46%) and other heavyweights of the fast food industry have long favored the franchise model, which enables companies to expand quickly without the investment of running the restaurants themselves. While the franchise model has enabled McDonald's to open 35,000 restaurants worldwide, it has also cost the company significant profits as company-operated locations deliver about twice as much operating profit on average as their franchise counterparts. 

Chipotle experimented with franchising before it was a publicly traded company, but quickly bought out those partners in order take control over its business. Food culture and people culture are at the center of Chipotle's business model, and resisting franchising has helped it maintain control over its brand and drive its success. In Entrepreneur magazine, Chipotle's Communication Director Chris Arnold said companies generally franchise because they need the money or need operators to run their restaurants. Chipotle, however, hasn't had that need. 

Similarly, Chipotle has maintained control by avoiding taking on debt. That means the company has no interest expense to cut into profits, and has no potential conflict of interest with creditors. McDonald's, by contrast, has nearly $15 billion in debt on its books.

It's already bested the competition
For several years, every hot restaurant IPO was rumored to be the "Next Chipotle," however nearly all of them have fizzled. Chipotle naysayers have consistently said that the restaurant's model can be easily replicated, and that the company is vulnerable to competition. There have been plenty of pretenders such as Qdoba, Baja Fresh, and Lime Fresh Mexican, but none of them have stuck.

Hedge fund manger David Einhorn famously announced he was shorting the burrito chain in 2012 due to, among other things, competition from Taco Bell's new Cantina Bowl lineup, essentially a cheaper imitation of Chipotle's menu. However, despite having many more locations than Chipotle, Taco Bell failed to knock Chipotle from its throne. At last check-in, Chipotle's comparable sales were up 17.3%, while at Taco Bell they improved just 3%. 

Commentators seem to have finally learned from their mistakes. While anyone can sell burritos, Chipotle's food quality and people culture are difficult to match, and the decision to not sell franchises or debt has only made the company stronger. With 1,700 restaurants and many more to come, Chipotle is only putting more distance between itself and the competition.

They're not resting on their laurels
The success of Chipotle in the U.S. is undeniable at this point, but the company is already taking steps to open up new revenue streams in three major ways. Expansion of Chipotle internationally, and rolling its new ShopHouse concept, which applies the Chipotle model of assembly and fresh-cooked food to Southeast Asian cuisine, and through an investment in Pizzeria Locale.

There are now eight ShopHouse Southeast Asian Kitchens with two more on the way. Reviews of ShopHouse have been solid thus far as the original location gets an 85% approval rating on UrbanSpoon. Though management has kept mum on the performance of ShopHouse thus far, expansion is picking up, and the new chain figures to be an important source of growth for Chipotle in the future.

Internationally, the company now has 17 restaurants outside of the US with the majority in the UK and Canada. Like ShopHouse, the international expansion is initially moving slowly as the company builds brand awareness, and prices in Europe are often higher to offset more expensive occupancy costs, but reviews have been generally positive. 

Finally, the company has become an investor in Pizzeria Locale, which, with just two locations, is the most nascent of its expansion options, but nonetheless, presents a third growth opportunity for the company. Of the three food concepts, pizza perhaps has the most potential due to its overwhelming popularity, and both of the restaurant's locations have received 4-star ratings on Yelp

One for the road
Chipotle Founder Steve Ells consistently reminds investors that the key driver of the company's growth for the foreseeable future will be Chipotle expansion in the U.S., but the fast casual chain is putting all the right pieces in place for continued growth for at least the next decade or two. It's maintained full control over its business, avoiding the conflicts with franchisees and creditors that hamper other restaurants, it's proven that its business model is not easily replicable, giving it a competitive advantage, and it has laid out a pipeline to ensure growth once Chipotle begins to saturate the domestic market. The stock's volatility will likely continue, but over the long-term Chipotle looks like a clear winner.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,306.80 (-0.04%) $0.46
McDonald's Corporation Stock Quote
McDonald's Corporation
$252.96 (2.46%) $6.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.