Chipotle: Wrapping Up a Tasty Stock

Includes: CMG, JACK, MCD, YUM
by: Cabot

By Brendan Coffey

Last month, in the midst of what was a dreary and largely snow-free February outside of Boston, my wife and I decided to break the winter monotony one day by bringing our two kids to the mall.

But the problem with a trip to the mall is the food options. Nowadays, you generally have two options at a mall–food court fast food or upscale casual places that end up being too risky (and too quiet!) to risk spending 90 minutes in with a temperamental toddler and an unpredictable infant.

So we tried a recently opened location of Chipotle Mexican Grill (NYSE:CMG). Chipotle is a chain of Tex-Mex “fast casual” restaurants that started in 1993 and grew under the guidance of McDonald’s (NYSE:MCD), which spun Chipotle off in an IPO four years ago.

We walked up to the counter and were greeted by a chipper employee who waited while we perused the small (management would say focused) menu, consisting of burritos, tacos, quesadillas and salads with the option for each of steak, chicken, pork and barbacoa, a spicy slow-roasted beef.

Two things immediately struck me about the restaurant, it had none of the stale, sometimes rancid smell of old frying oil fast food joints often acquire, because there is very little deep-frying going on, and the workers seemed happy.

For our part, we both quite liked the food, the meat was tasty and the lettuce was crisp and it all seemed a fine value for around $7 for each of the adult meals.

While it was the first time I had eaten at a Chipotle, I admit I was already familiar with the company. It’s one of the highest profile companies looking to offer humanely raised meat in its restaurants, along with growth hormone-free dairy products and organic beans.

Chipotle calls it “Food with Integrity,” which they define as sourcing from cattle, cows and pigs that are pastured, vegetarian fed and free of antibiotics and growth hormones. As parents, we look to avoid giving our kids food that isn’t organic or which doesn’t come from hormone-free and antibiotic-free animals (I won’t digress into the details why, but I’d suggest reading “Fast Food Nation” by Eric Schlosser and “The Omnivore’s Dilemma” by Michael Pollan for a disturbing and revealing look at our mainstream food supply).

Plus, as someone who spent many summers in my youth helping out on my uncles’ dairy farms in Ireland, I feel strongly that animals need to be treated with respect and pastured when possible, so much so that instead of supermarket meat, we’ve just started getting deliveries from Vermont’s Houde Family Farm, a small farm that will regularly deliver meat from humanely raised, hormone-free livestock.

In Chipotle’s case, all of its pork and chicken meets the chain’s stated natural guidelines and, at locations here in Massachusetts, all of its beef also meets the goal (the level is 60% nationally, expected to grow to 70% by 2011).

There is another reason I bring up Chipotle today; it’s a "heckuva" stock. Since early January, shares have surged 23% from 90 to over 110 and are primed to rise further, having clearly and easily held technical support along the 50-day and 200-day moving averages in recent months. Charts indicate there may be some resistance around 130, but it looks like it will be mild.

From that point, there should only be a little selling pressure from people who bought around the all-time high of 150, touched right before the economic crisis hit in 2008. Mutual funds have added nicely to their already strong positions in Chipotle lately. That translates into excellent share support in rough markets, while a $100 million share buyback plan in 2010 will further boost the stock.

Beyond technical strength, I’m a believer that strong fundamentals beget strong technicals, and Chipotle supports that argument. The chain reported a sales increase of 19% in 2009 to $1.5 billion, including decent same-store sales gains of 2.2%. The company, with 986 locations right now, plans to open another 120 or so this year.

It’s also looking to build onto its menu by testing breakfast fare at its Dulles airport location, and a possible kids’ menu (it turns out the kids’ menu that gave my Lila such enjoyment is actually a test-run for possible wider rollout). Management is still evaluating, but believes it sees signs the kids’ menu is producing outsized gains in sales and check size.

Compare that to competitor Qdoba Mexican Grill, owned by Jack in the Box (NASDAQ:JACK), which saw same store sales fall 1.7% in its most recent quarter on top of a 1.1% slip the prior year period. Cheap Mexican food competitor Taco Bell of Yum Brands (NYSE:YUM), draws in the late night munchies crowd with its 99-cent Volcano Tacos, but pulls in $500,000 fewer sales per location annually than Chipotle.

I detailed Cabot Green Investor subscribers all about Chipotle in our March issue, out earlier this month. We usually cover alternative energy and technology stocks in Cabot Green Investor (and our other stock pick this month is a crucial player in the growing LED market whose shares are taking off–and no, it’s not Cree, which was already in the Green portfolio and is up 23% for us this year).

But the world of Green also includes fascinating lifestyle growth plays and we occasionally leap into the exceptional names we’re seeing in order to make profits.

Contrary to what many experts predicted entering the most recent recession, Green lifestyle spending, especially on food and drink, hasn’t dropped in response to the poor economy–it has simply slowed its growth, and that’s in sectors where overall sales have fallen. That strength has shown itself in share performance: A look at the subsector of Green food and beverage related stocks we track for Cabot Green Investor reveals that every stock in the subsector has outpaced the S&P over the past year.

I recently dug through all the polls and surveys I could find from 2009 and 2010. I estimate from those that about one in 10 consumers chooses to patronize a company (or chooses to avoid it) based on its environmental reputation. That’s not a huge percentage, but it’s enough to give some companies an edge–after all, when it came to a decision that day between McDonald’s, Chik-Fil-A or Chipotle, the decision had essentially already been made for me and my wife. For the other 90%, there’s the taste of the food, and Chipotle more than holds its own there.

No stock is buy-and-forget-about, but Chipotle presents a nice opportunity to make money right now and for the foreseeable future.