Chipotle Mexican Grill Inc. (NYSE:CMG) is a fast-consumer industry stock that has shown impressive growth in price ever since its public listing. The company's stock has experienced a growth of 179% from February to December of 2013. The emphasis of this report lies solely on determining whether or not the same growth in the stock price can be projected for the future or if now is a good time to take a short-term position regarding the stock.
Chipotle's restaurants are mainly distributed across the United States as shown by the company's recent quarterly statements. Approximately 99% of Chipotle's restaurants are spread over the US with the remaining 1% distributed across Canada, England, France, and Germany. With that in mind, we will rely on the US economy's performance to reflect the company's performance for the future.
US Consumer Trend
The Restaurant Performance Index (RPI) for the US economy is finally looking up after a dismal recessionary period. To be precise, the monthly performance index, released by the National Restaurant Association (NRA), has stayed above 100 for the ninth consecutive month. An index value above 100 indicates that the industry is experiencing or is expected to enter the expansionary phase depending on which component of the index (Current Situation Index or Expectation Index) we are looking at. RPI stood at 101.2 in November 2013 and that was the highest level since June of the same year. Considering that the index measures the health and the future outlook of the country as driven by same-store sales and consumer traffic in the restaurants, restaurant owners are optimistic about 2014. The annual performance of the index is shown in the graph below and dates back to 2003.
Source: National Restaurant Association
Now let us discuss consumer spending in the Quick Service Restaurants (NYSE:QSR) industry segment. Although consumer spending has been dismal for the first half of the 2013 it has shown a positive trend after the end of the third quarter of 2013 compared to the same period of the previous year. However, restaurant visits remained flat. This year is expected to be better for the QSR industry and consumer traffic is expected to rise by at least 1% and spending is expected to increase by 3%.
The following table indicates the results of a survey conducted by Gallup that measures changes in the consumption pattern of Americans today.
Consumers today are drifting away from fast food restaurants. In the same survey, 48% of Americans marked fast foods as unhealthy. Consumers are increasingly switching to healthier food substitutes such as gluten-free products. The market for gluten-free products experienced a growth of about 44% in 2013 and is expected to grow at an even higher growth rate of 48% in 2014. According to a survey conducted consumers who purchase gluten-free products do so for varying reasons. The following pie chart shows the distribution of consumers who purchase gluten-free products and their reasons for doing so.
Source: Packaged Facts Survey
Chipotle's Responsiveness to Industry Changes
Chipotle is a dignified restaurant chain that claims to use food ingredients that are both animal and environmentally friendly. The company is proud to maintain the fact that it uses organic foods and meat from animals that are raised in a natural manner (i.e. raised without using any antibiotics or hormones).
To further its operations in serving healthier food substitutes to consumers Chipotle has started operations in similar markets. The company's new chain, ShopHouse Southeast Asian Kitchen, specializes in serving gluten-free and dairy-free Southeast Asian dishes as demanded by consumers. Other than that, Chipotle has partnered with a small pizza chain, Pizzeria Locale, to further grow its operations in the healthy fast food market. The pizza industry is relatively insensitive to recessionary pressures as shown by the consistent sales despite sky rocketing prices and depleting household incomes. Statistics indicate that 93% of Americans eat at least one pizza per month. Therefore, Pizzeria Locale is expected to bring in growth in company revenues in the long term.
Recent Company Performance
During the third quarter of 2013 the company's same store sales went up by approximately 6% and its net income increased by approximately 15%. The sales are expected to improve in the future because of the rising RPI discussed above. The company's revenues have been growing at a spectacular rate of 21.6% over the past three years. The industry average for revenue growth presently stands at 9.6% denoting the fact that Chipotle is performing better than the industry.
Moreover, with no debt shown in the company's financial statements the company actually bought back a small portion of its shares and currently has 31 million shares outstanding in 2013 compared to 32 million outstanding shares in 2012. There are two strong interrelated points that must be mentioned here. First, the company bought back its shares from its free cash flows indicating that it is positive about its future profitability. Second, share buyback improved the percentage ownership of the remaining investors and enhanced the value of their voting rights.
The casual dining industry is expected to experience a positive growth trend in 2014. To reiterate, although consumer behavior is drifting away from health hazardous fast foods the healthy food industry is expected to show high growth. Chipotle is very active in realizing the changing consumer behavior and is capitalizing on its growth opportunities in a timely fashion. The company is likely to continue to deliver positive returns to investors therefore I recommend buying the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.