Chipotle Mexican Grill: A Distinguished Spin-off With Great Potential

| About: Chipotle Mexican (CMG)

Chipotle Mexican Grill, Inc. (NYSE:CMG) is a leading Mexican food restaurant that has created a niche segment of the restaurant industry: fast-casual food. Founded in 1993, CMG was spun-off from McDonald’s Corp. (NYSE:MCD) on 1/26/06. Collectively, the firm now operates over 530 stores spread out over the U.S.

The restaurant company was founded on principles that naturally distinguish it from its parent company. The vision of the company is to create an environment that provides its customers with food on-the-go, without having to sacrifice the quality. CMG prides itself on providing high quality ingredients and investigating from where the foods originate. Unlike its former parent, CMG claims that it provides naturally raised meats as well as organic produce. This is a major differentiator, and changes the game for an ever growing population of health-conscious fast-food consumers, families and young adults on the go.

Joining a melee of original and culturally popular new businesses, CMG has been innovating ideas that draw publicity and add to its brand equity. The latest was a contest for college students to create for them a 30-second commercial that would draw the most views on the popular video website Google's (NASDAQ:GOOG) Contestants were encouraged to market their submissions in order to draw the most views. In the end, the contestants achieved a total of more than 17 million views, with the most viewed video drawing more than 8 million. This all came at a cost of $50,000 for CMG.

In the end, what emerged is a Mexican-style restaurant that serves plentiful variations of about four dishes. This focus maintains strong controls on sourcing, training and on-site food production. It is an efficient model.

With the increasing scope and value of CMG, it appears that the firm is in a promising position in the market for fast-casual food, and its growth fundamentals reflect this. Over the past year, revenue for CMG grew 33.46%, with market capitalization growing to $1.72 billion. As the firm has grown, profitability has not lagged, with trailing twelve month operating margins of 7.51%, compared to a 5.52% industry average and trailing twelve month gross margins of 33.25% compared to a 31.93% industry average.

Despite this strong growth and profit margin, CMG may still be trading at a low price. Although its price to earnings [P/E] ratio is higher than the full restaurant industry average, its price to book [P/B] ratio is at 3.9 compared to the industry’s 4.6. Given these compelling data points, our algorithms calculate continued strong potential returns for this spun-off company.

CMG 1-yr chart

Disclosure: Chipotle Mexican Grill (CMG) is a constituent in the Clear Spin-Off Index.