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Top Growth Stock

Chipotle Mexican Grill (NYSE:CMG) has performed exceptionally well over the last several years and looks to maintain its strength. Although it is currently overvalued at $548, those looking to buy the "crème de la crème" of the restaurant industry should look to load up on a pullback. My fair value for CMG stands at $510 and anything around this price is a good buy.

Compared to the industry's biggest, McDonald's (NYSE:MCD) and YUM! Brands (NYSE:YUM), Chipotle is producing twice as much operating cash flow per share. Sales per share are even more impressive at almost four times that of MCD or YUM. Chipotle does lag its larger competitors in turning revenue into profit. However, McDonald's has been around long enough to achieve a very high degree of profitability through increased efficiencies and YUM! Brands doesn't edge out Chipotle by much is this area.

The following table highlights sales per share, operating cash flow per share, and profitability for the large cap restaurants.

Per Share Sales, Operating Cash Flow, & Net Margin

StockSales/ShareOCF/ShareNet Margin
CMG$103.90$13.5810.20%
MCD$28.25$6.9919.90%
YUM$29.38$4.9013.10%

Chipotle has done a good job increasing profitability with steadily increasing margins year over year. The company has grown operating cash flow at a three-year compound growth rate of 15% and produced significant free cash flow in 2013 to the tune of $10.51 per share. This provides CMG with a high degree of flexibility in expanding operations. For comparative purposes, McDonald's and YUM! Brands produced free cash flow of $4.14 and $1.96 per share over the last four quarters.

Earnings growth has been strong over the last five years, running at an annual compound growth rate of 21.5%. Projected EPS growth over the next five years is estimated to remain at that level.

Historical market valuation for CMG has been very consistent over the last three years. The following table depicts forward P/E ratio highs and lows for CMG since 2011.

Chipotle Mexican Grill Historical Forward P/E Range

FP/E HighFP/E LowFP/E Average

2011

39.7624.3532.06
201242.2522.3332.29
201342.5620.5731.57
YTD 201435.3829.9032.64

Based on 2015 EPS estimates of $16.08 and fair value P/E multiple of 31.83, I maintain a one-year price target of $511.82.

Top Dividend Stock

Although McDonald's isn't at the top of the list for growth, shares of the Big Mac giant are attractively valued at $95. Those looking for a high quality dividend-growth stock can consider buying MCD at its current valuation. My one-year price target for MCD is $104.29 based on projected 2015 EPS of $6.34 and fair value P/E ratio of 16.45.

McDonald's Historical Forward P/E Range

FP/E HighFP/E LowFP/E Average
201118.8413.4616.15
201218.4215.0116.71
201317.7015.0516.37
YTD 201415.3114.5514.93

Dividend growth for MCD has been consistent at a current five-year compound annual growth rate of 8.76%. The company backs a long-standing record of increasing dividends every year for the last 38 years and carries a 3.41% yield.

Top Value Play

YUM! Brands' expected growth isn't anything to write home about. However, the price willing to be paid for growth is a major factor in any investment decision. YUM is currently trading at an approximate 12.5% discount to fair value based on estimated 2015 EPS of $4.13. My one-year price target using a fair P/E multiple of 20.13 would place shares of YUM at $83.14. YUM's expected annual growth stands at 11.76% over the next five years.

YUM! Brands Historical Forward P/E Range

FP/E HighFP/E LowFP/E Average
201118.4514.2816.37
201225.6920.0722.88
201322.0416.7219.38
YTD 201418.7215.9417.33

In terms of modified forward P/E to growth, YUM is currently the best value compared to MCD or CMG. The following highlights modified forward PEG figures for McDonald's, Chipotle, and YUM! Brands. Modified forward PEG is adjusted based on historical market valuations over the last three years. The metric is decreased if the stock is trading at a discount and increased if the stock is trading at a premium compared with historical valuations.

Current Valuation, Premium/Discount, & Modified Forward PEG

StockCurrent FP/E+Premium/-Discount to Fair ValueModified FPEG
CMG34.09+7.07%1.72
MCD14.96-9.07%1.53
YUM17.62-12.47%1.31

Conclusion

Chipotle's impressive earnings growth and share performance clearly show it as a dominant company in the restaurant space. It is not much of a surprise that growth is currently trading at a premium. I believe it provides the best large-cap investment opportunity in the industry long term although YUM! Brands may provide the better value short term.

Disclosure: I am long MCD. 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.

Source: Chipotle Top Restaurant Large Cap For Growth, But Wait For A Pullback