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Better Buy: Chipotle Mexican Grill, Inc. vs. Shake Shack

By Rick Munarriz - Feb 10, 2016 at 9:07AM

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Shares of the once-hot chains have been getting smoked, but both concepts are working on a recipe for a turnaround.

Two of the market's hottest fast-casual darlings from a year ago have run cold these days. Shares of Chipotle Mexican Grill (CMG 0.26%) and Shake Shack (SHAK -0.01%) have surrendered 42% and 64% of their value, respectively, since hitting all-time highs last year.

Both stocks have become market laggards, but they have taken different paths to the land of forgotten eatery stocks.

Chipotle's demise has been widely publicized, as outbreaks of gastrointestinal illnesses last year crushed the market's appetite for its signature cilantro rice-topped burritos, tacos, salads, and bowls. Year-over-year comps have fallen 16%, 30%, and 36% in November, December, and January, respectively. The defections are real, but Chipotle is now comfortable in saying that the incidents are fading in the rearview mirror.

Shake Shack hasn't been making its patrons ill, but the stock's valuation at its frenzied springtime peak last year made more than a few investors sick. The chain specializing in burgers, frozen custard treats, and now fried chicken sandwiches simply got ahead of itself in its first few months of public trading. Its more recent investors are the ones who have been paying the price for the initial excess.

These stocks have taken a beating, but which one is the better option for investors these days? It's a question that restaurant investors have been asking often, so let's see how the two companies stack up in that regard.

Both concepts have plenty of room to run. Chipotle is now up to 2,010 units. That may seem like a lot, but it can add thousands more locations before it saturates the market. If and when it gets there, Chipotle already has younger pizza and Asian concepts in operation that could take the growth baton and run at that point. 

Shake Shack is much earlier in its growth cycle with just 41 company-owned locations. This gives it a lot more running room. It expects to open 14 new units in 2016, a 34% spike in space. Chipotle is targeting 220-235 new locations. That's a lot more openings, but it represents just 11% to 12% growth.

Another point in Shake Shack's favor is that it's not currently suffering through a popularity crisis. Shake Shack won't report quarterly results for a few more weeks, but it's coming off of a third quarter where comps soared a jaw-dropping 17.1% spike, up 14.3% through the first nine months of the year. At the time, its guidance was calling for comparable-restaurant sales to climb 11% to 12% for all of 2015, implying that comps for the holiday quarter would be in the low to mid-single digits. That's some serious deceleration, but a far cry from Chipotle's 14.6% slide in comps during the fourth quarter. 

However, then we get to the final weigh station -- valuation. It's not even close. Chipotle's trading at a stiff 52 times this year's profit forecast, but that's because analysts see a brutal first half where it will earn a quarter of what it did in 2015. The multiple gets more reasonable if we look out to a recovery in 2017, with Chipotle fetching a little less than 30 times earnings. That's certainly not cheap, especially for a company in a sticky brand-restoring situation, but it's a relative bargain when pitted against Shake Shack. The trendy burger chain trades at a whopping 86 times this new year's bottom-line target and 73 times next year's projection. There's also a wide disparity on the top-line multiple, with Shake Shack going for roughly seven times this new year's revenue target while Chipotle's multiple is closer to three. 

Neither stock is cheap by conventional measuring sticks, but remember that both are growing primarily through company-owned stores. Those aren't cheap to open, unlike franchisee-driven models where capital expenditures are minimal on the company's behalf. Then again, running company-owned operations also makes it possible for a hot concept to make a lot more money than its peers with fewer locations.

Both stocks are in better shape than their recent charts suggest, and deciding on the better buy depends on your criteria. Shake Shack is the better buy in terms of raw upside and untarnished fundamentals. Chipotle gets the nod for valuation pundits. Both have the right ingredients to roar back into fancy later this year. 

Rick Munarriz owns shares of Shake Shack. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,709.90 (0.26%) $4.41
Shake Shack Inc. Stock Quote
Shake Shack Inc.
$51.99 (-0.01%) $0.01

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