Chipotle: An Evergreen Stock You Must Buy

Oct. 4.13 | About: Chipotle Mexican (CMG)

In the second quarter of 2013, fast, casual Chipotle Mexican Grill (CMG) reported revenue of $816.8 million, up 18.2% compared to the previous year. The growth represented the opening of new restaurants. Its comparable restaurant sales increased 5.5% quarter over quarter. During the quarter, Chipotle opened around 44 new restaurants, bringing the restaurant total to 1,502 in the U.S.

Breakfast menu expansion can bring in extra profit

Many fast food restaurant chains have made breakfast a focus in recent years as they can make extra profit serving people in need of a fast breakfast. Chipotle's major competitor -- Yum!'s (YUM) Taco Bell, has been aggressively expanding its breakfast menu to take a major share from Chipotle. In August, Taco Bell introduced its 'Waffle Taco' to its First Meal breakfast platform across 100 units in the U.S. with a wide range of fillings such as whipped cream, fruits, or piece of fried chicken in the waffle taco. The waffle attracted many customers in outlets of California. Looking at the demand and preference for waffle tacos, the company has started offering the tacos throughout the day rather than limiting them to breakfast hours. Taco Bell plans to expand its breakfast testing program to the rest of its units.

Like Taco Bell, Chipotle has been testing its breakfast menu and a coffee unit at its unit in Washington, D.C, with one of the most sophisticated coffee roasters, La Colombe, which is served at the best restaurants in the U.S. This can easily help Chipotle separate itself from its competitors in terms of coffee served. If the testing of the coffee unit is successful, the company can expand its coffee unit to the rest of its restaurants in the U.S.

In addition, Chipotle has been testing its breakfast menu at the Baltimore-Washington International Airport. The company had to scrap the breakfast menu after customers continually asked for their regular menu, which is served for lunch and dinner, therefore rejecting the breakfast menu. Hence, Chipotle has chosen to serve its regular menu during the morning hours. With this, the company believes in improving its main menu in order to continue to grow strongly. Chipotle's commitment to improve the taste and quality of food by using excellent quality ingredients motivates customers to make frequent visits.

Both companies have an opportunity to grab a bigger share, as U.S. residents spend approximately $42 billion on restaurant breakfasts annually. If the coffee testing turns out to be successful and Chipotle continues to serve its regular menu during the breakfast hours, it is likely to grab a share of the annual breakfast spending.

Better Performance Relative to Peer

The Denver-based Chipotle and its peer, St. Louis-based Panera Bread (NASDAQ:PNRA), are known for burritos and bakery items respectively. Even though the two companies offer a distinct variety of food, they are the leaders of fast, casual food sector. Chipotle and Panera reported improved comparable sales of 5.5% and 3.8% respectively in the second quarter of this year. The growth represents the profits earned through new restaurants. Within the restaurant industry, quick service restaurants are rapidly growing in the U.S. According to Hoover's study, quick service restaurant sales growth is estimated to increase 8% year over year until 2016. Being the leaders in the quick service sector, both Chipotle and Panera are planning to open more units this year to take advantage of the opportunity. Chipotle plans to open around 88 new restaurants by the end of the year, and Panera looks forward to open approximately 115-125 units this year. The increase in the number of restaurants will continue to bring growth in sales for both companies.

Let's find out which company has more growth prospects among the two leaders based on valuation metrics.

Valuation metrics

Chipotle

Panera Bread

Trailing P/E

43.78

26.45

Forward P/E

32.13

21.51

Profit Margin

10.13%

8.32%

Click to enlarge

Source: Yahoo Finance

Chipotle has the highest multiples compared to Panera. The company's profit margin of 10.13% indicates that its pricing and cost strategies are well controlled compared to Panera. Both Chipotle and Panera have a potential growth in earnings with an expected EPS of $12.92 and $7.83 respectively for next year. Chipotle's profit margin, expected EPS, and forward PE, which is relatively lower than its trailing PE, all show more growth prospects compared to its peer, making it the leader in the fast casual sector.

Considering the above two fundamentals that can bring growth for Chipotle, we assume these fundamentals will drive in revenue this year. It reported total revenue of $2.73 billion in 2012, and its total revenue growth last year was around 20% year over year. Assuming a similar growth rate to remain constant, we estimate total revenue of $3.27 billion for this year. Additionally, we believe that the above two fundamentals will bring meaningful growth to the company, helping it generate higher revenue.

Conclusion

The expansion of new restaurants should continue to bring in revenue for Chipotle as it did in the second quarter. Although the company wasn't successful in its breakfast menu offering, it will continue to make profits through its well-known regular menu. Its commitment to improving and offering good excellent quality food will continue to attract more customers. Looking at the fundamentals and valuation metrics, Chipotle is an attractive option for investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.