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Forget Chipotle Mexican Grill, Inc: Here are 2 Better Stocks

By Tamara Walsh - Feb 17, 2016 at 5:30PM

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Trying to catch Chipotle Mexican Grill on a rebound adds unnecessary risk for investors today. Here are two rival restaurant stocks we would buy instead.

Chipotle Mexican Grill (CMG -1.56%) was making its customers sick. A string of food-safety issues has poisoned the fast-casual Mexican chain lately and damaged its reputation for quality food. Outbreaks of E. coli, norovirus, and salmonella caused dozens of Chipotle customers across the country to call in sick in recent months and forced the restaurant chain to temporarily shut down operations at some locations.

Once a Wall Street darling, Chipotle's stock has plummeted more than 35% in the past six months as a result of these food scares. With shares now trading around $482 a pop or just 20% above the stock's 52-week low, you'd think the stock was cheap. However, a deeper look reveals Chipotle's price-to-earnings growth ratio is 2.37 today or significantly above the industry average PEG of 1.69. Throw in one of the highest P/E ratios in the industry and the stock appears pricey, despite the recent sell-off.

Image Source: The Motley Fool.

In time, hungry Americans will undoubtedly return to Chipotle restaurants in droves. After all, this isn't the first time a popular eatery has suffered a food scare, and it won't be the last. In addition to overhauling its food-handling practices, Chipotle plans to launch a massive marketing campaign to convince consumers its food is safe.

While we wait for Chipotle to get it together, investors are better served in names like Panera Bread (PNRA) and Starbucks (SBUX -0.63%). Neither Panera nor Starbucks are cheap stocks today. However, they both offer investors' strong earnings growth and reliability in an otherwise unstable market.

A warm embrace from rivals
The foodborne illnesses pushed many would-be Chipotle customers into the arms of competitors such as Panera Bread. Customers avoided Chipotle restaurants like the plague in December when the U.S. Food and Drug Administration opened an investigation into an E. coli outbreak at the Mexican chain. This caused a 30% decline in same-store sales that month as customers opted to eat elsewhere.

Chipotle suffered an overall 15% decline in comparable store sales during its fourth-quarter as a result. Meanwhile, Panera posted a same-store sales gain of 2.3% in its recent fourth-quarter, thanks in part to increased traffic at those restaurants. Panera is also a better buy now because of its longer-term growth initiatives.

While Chipotle is busy cleaning up its food-safety mess and trying to entice customers back through its doors, Panera is aggressively embracing the 21st century with its 2.0 mobile and delivery initiative. As of the fourth-quarter, Panera had converted 410 of its bakery-cafes to Panera 2.0. Those locations now offer Rapid Pick Up and Fast Lane Kiosks to make it faster and easier for customers to dine in or take out from Panera's restaurants.

On top of this, more than 2 million guests have downloaded Panera's mobile app since it launched in 2014 as part of the Panera 2.0 overhaul. The initial results of this digital and mobile venture are overwhelmingly positive. In fact, same-store sales at Panera locations that had been converted to the 2.0 format rose a whopping 8.1% during the fourth-quarter, compared to the 2.3% overall comparable sales growth the company reported in the period. Ultimately, this could drive long-term sales growth for the company.

Not your average cup of Joe
Starbucks is another winning stock that won't leave investors sick and starving for growth. The java giant pays a dividend, albeit a modest one. This means that unlike Chipotle's stock, Starbucks offers investors both income and earnings growth. Sure, Starbucks only pays an $0.80 annual dividend with a yield of 1.42% today. However, the coffee retailer's ability to generate loads of cash flow mean it should have no problem consistently growing those payouts for decades to come.

Starbucks grew its earnings by more than 33% this year. Moreover, management's ongoing investments in stand-alone brands such as Teavana, La Boulange, and Evolution Fresh are fueling revenue growth and helping Starbucks diversify the way it generates profits. Down the road, this will also mean potentially lucrative grocery sales as Starbucks rolls these brands into its consumer packaged goods platform. Chipotle, on the other hand, is a solid restaurant outfit but that is the extent of its growth channels at this point.

Image Source: Starbucks.

Similar to Panera, Starbucks boasts one of the strongest mobile and digital programs in the retail space today. Starbucks launched Mobile Order & Pay in the U.S. last year to great fanfare. The mobile service enables guests to order ahead from a smartphone device and pick up their order in a nearby Starbucks locations -- thereby saving time by skipping the lines. The service is now available in over 7,400 Starbucks cafés nationwide.

The ongoing success of Mobile Order & Pay is a big deal for Starbucks and its investors because the coffee retailer generates higher margins from purchases made through the mobile service. Given these catalysts, Starbucks should be able to reward shareholders with long-term dividend growth as well as overall earnings growth. This too should help drive Starbucks stock higher regardless of near-term weakness in the broader market.

While Chipotle worries about not making its customers sick, the company is losing ground to Panera and Starbucks, both in terms of technological growth and overall customer satisfaction.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,341.40 (-1.56%) $-21.31
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$79.02 (-0.63%) $0.50
Panera Bread Company Stock Quote
Panera Bread Company
PNRA

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

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