Dueling Fools: Chipotle Bull

Investing in growing restaurant concepts can sometimes be a recipe for portfolio heartburn. But if you can stomach occasionally lofty valuations, the payoff could also be delicious.

Since its spinoff from fast-food titan McDonald's, Chipotle Mexican Grill (NYSE:CMG) (NYSE:CMG-B) has posted sizzling numbers and red-hot growth. Given a number of merits I'll discuss below, I think it's got an excellent chance of standing apart from the fast-food competition.

Let's first get Chipotle's key drawback out on the table -- it's expensive. Its shares currently trade at almost 55 times trailing earnings, up 70% from the 52-week lows reached last summer. That may be too rich for most investors to digest, but Fools have good reasons to consider riding out any discomfort.

For starters, Chipotle's forward P/E multiple is only 45. OK, that doesn't really drop the stock to value-menu levels, but consider that it's growing sales by more than 30% annually. Recent quarterly sales growth came in at a mere 26%, but that still far outpaced analyst projections; meanwhile, earnings advanced a spicy 46%. Analysts expect a hefty 33% earnings jump for all of 2007.

That's some aggressive growth -- exactly what Chipotle needs to make investors a lot of dinero from here on out. A few key ingredients could help it reach the lofty growth expectations Wall Street has placed upon it.

With only 600 stores, it's got plenty of real estate left to cover. Management plans to fill that gap rapidly, with 110-120 new stores slated to open in 2007. Additionally, fellow Fool Dave Meier recently touted McDonald's vital influence in molding Chipotle into a seasoned restaurant concept. What better mentor than the planet's most successful restaurateur to help Chipotle develop expertise in emphasizing a straightforward menu, standardizing its food-preparation techniques, creating a friendly, warm environment, and serving a consistently tasty product?

Chipotle's heritage definitely helps set it apart from the other fast-growing restaurant chains I've highlighted below:

All concepts have very compelling expansion opportunities, but I see Chipotle's fast-food focus as an advantage, providing it access to more of the mass market. Starbucks is a widely popular coffee chain that has rewarded investors with double-digit growth for nearly two decades. Sonic also has mass appeal, but a recent leveraging of its balance sheet makes me wary. In contrast, P.F. Chang's, Buffalo Wild Wings, and Texas Roadhouse are casual-dining concepts.

The other players also operate larger stores, contributing to significantly higher build-out costs. Additionally, a sit-down environment means greater server and cook-staff coordination, not to mention the higher square-footage costs for customers to dine in.

Chipotle's high P/E promises significant downside if the company's growth fails to live up to Wall Street's expectations. However, the concept has plenty of remaining potential, and if Chipotle plays its cards right, the upside is even more substantial.

The Duel's not done yet! Go back and read the other arguments, then vote for the winner, and share your own opinions on Chipotle in Motley Fool CAPS.

Chipotle is a Rule Breakers stock pick, while Motley Fool Hidden Gems singles out its B-shares. Buffalo Wild Wings is also a Hidden Gems selection. Starbucks is aMotley Fool Stock Advisor recommendation. Check into any of these newsletters for the next 30 days with a free trial subscription offer.

Fool contributor Ryan Fuhrmann is long shares of Starbucks but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.