Chipotle A Solid Long-Term Investment

Apr.16.14 | About: Chipotle Mexican (CMG)


A large addressable market and the prospect of global expansion will support future growth.

The growth in the top-line as well as bottom-line justifies the rise in the stock price.

A change in eating trends is in favor of fast casual restaurants that offer healthy food.

Chipotle Mexican Grill (NYSE:CMG) was founded on the principles of "Food with integrity" - the restaurant chain uses the largest amount of organic ingredients compared to its peers. The company has rapidly expanded operations over the last 20 years and it has restaurants at 1,595 locations - becoming one of the fastest growing restaurant chains. In this article, we will discuss how much growth prospects are there for the company and also talk about the competition faced by the restaurant chain.

Future Growth Prospects

Chipotle Mexican Grill has been growing at an exceptional rate - over the last year, the company opened 185 new restaurants and delivered revenue of $3.21 billion, an increase of 17.7% for the year. The restaurant-level operating margins were among the best in the industry at 26.6%, delivering earnings per share of $10.47, an increase of 19.7% over 2012. However, revenue growth in the restaurant industry strongly depends on the economic conditions, based on consumer spending and disposable income.

Fast food restaurant demand will continue to increase with improving economic conditions. According to studies conducted by Statista, revenue in the fast food industry is expected to increase from around $200 billion in 2013 to $210 billion by 2016 in the United States. Also, the spending on goods and services is expected to increase by $12 trillion, an increase of 43%, globally between 2010 and 2020. Therefore, fast casual restaurants are expected to continue enjoying growth over the next few years.

Being one of the restaurant industry's leading growth companies, Chipotle still holds huge growth prospects in its hands. The company has spread out more than 1,500 restaurants in the United States and more restaurants are planned over the next few years. However, the company has not totally captured the international market and there are a lot of regions where the company can expand. The company has a few restaurants outside the U.S and could use its resources to take advantage of the opportunities in international markets as well.


Now that most customers are starting to think about eating healthy, fast casual restaurants are a big attraction for them. They have relatively healthier menus from traditional quick service restaurants (NYSE:QSR) such as McDonald's (NYSE:MCD). The high quality ingredients of fast casual restaurants are also luring customers to even pay a higher price for healthier food options as compared to QSRs. According to a recent survey by the NPD Group, customer traffic gained an increase over the last five years in fast casual restaurants like Chipotle, Smashburger or Panera Bread (NASDAQ:PNRA). This also shows the strength of this business segment over the severe economic downturn period. Other competitors in the market are also trying to retain their customers by introducing healthier foods in their menus. McDonald's, the leader among QSRs, also tried to add healthier food items to its menu to change the perception of its unhealthy food, but recorded fewer sales than expected.

The fast casual restaurant industry continues to be one of the leading growth segments for the restaurant industry. With such a huge growth potential with expanded customer base, the industry becomes very lucrative for new entrants. Therefore, Chipotle has to prepare itself for any potential competitors in the coming years. The company has diversified its product range by adding some entertainment and its ShopHouse and Pizzeria Locale brands. The entertainment segment includes a recently announced television show along with short films and mobile games that could earn rewards for game players such as free food at Chipotle restaurants. Moreover, the recently acquired ownership stake in Pizzeria Locale, which is a fast casual pizza brand, will help the company grow and expand its business model across different cultural foods.


CMG gained over 56% during the last twelve months. However, in the shorter time period (one month) the stock has lost over 4%. There are doubts in the minds of investors that the stock is overvalued at current levels. However, as the company continues to show growth in both top-line as well as bottom-line and keeping in mind future growth prospects. We believe the rise in the stock price is justified. Furthermore, we believe the company has a lot of room to bring its brand to new geographic locations that will support its future growth. We are seeing continued growth in free cash flows despite year-over-year increases in CapEx - this shows that the company is getting a good return on its CapEx and continues to convert its revenues into cash flows. Furthermore, the company beats the industry on revenues growth (20.5%), operating margin (16.6%) and net margin (10.2%). Most of the fundamental indicators are in favor of the company and we believe we will see further increase in the stock price over the next 12-18 months.


Forecasted growth in the restaurant industry and an increase in consumer spending will result in considerable growth for Chipotle Mexican Grill. The company has outperformed over the last two decades and is constantly expanding with a restaurant count of more than 1,500. The demand for healthier food supports Chipotle's business model and it will result in continued growth in the future. The company has a strong brand image, huge growth potential and focused business model which makes it a winner in the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.