Chipotle Mexican Grill (CMG) has been a hot stock. The current price to earnings ratio around 56, and the high level of institutional ownership support that assertion. The company, which produces high-quality burritos and salads for the masses, has had an impressive run up since its IPO only six years ago. In that time Chipotle has grown in size and market value and has created its own category in the food industry. The category, known as "fast casual," includes other Southwest-oriented brands, like Qdoba. The stock has made an impressive 600% rise since its IPO and 2011 was a continuation of that trend. The stock rose roughly 75% last year on increasingly volatile trading. However, momentum and volume are in decline and negative pressure is building. The put/call ratio is above average, indicating growing fear among shareholders.
The fourth quarter 2011 and full year results were good but not spectacular. Fourth quarter earnings were a near miss at $1.81 per share, but an improvement over last year of nearly 23%. Full year earnings also improved by around 20%. Increases in traffic and sales drove these gains but the growing costs of food commodities had a negative impact on results. Food costs rose nearly 2% in 2011 but were offset by increased customer traffic and increased revenue from new stores. Chipotle was able to maintain the same growth rate in 2011 as it had in 2010.
Chipotle has a decent history of earnings growth despite a negative earnings surprise ratio of -0.6%. Over the last six quarters, Chipotle has beaten earnings estimates four times and earnings growth increased significantly during the last three. New store openings and revenues outpaced commodity price increases. Management is expecting the trends of 2011 to continue in 2012 results. Chipotle is expecting to open over 150 new stores and increase same store sales by about 5-6 percent. The company is also expecting to see further increases in costs related to commodities. Management's statement went on to say that its estimates are based on data from stores open for at least 12 months.
The expectations of slowing world growth do not seem to be affecting Chipotle Mexican Grill. The fast food chain operates in the United States, Canada and the United Kingdom, and has limited exposure to the European debt crisis and slowing nominal GDP growth in China. The US is expected to grow at a rate of about 2.5% in 2012, up from the 2011 level of 1.7%. Recent jobs data shows a decrease in unemployment, which is evidence of strengthening economic recovery at Chipotle's home.
The stock, which is currently trading around $360 on declining volume, may have reached a plateau. Investors have been seeking safer places to invest in lieu of growth stocks. The performance of the Dow Dogs in 2011 shows how important dividends are to investors. Chipotle, which is not currently paying a dividend, is way overvalued compared to dividend-yielding stocks in the fast food marketplace.
McDonald's (MCD) and Yum Brands (YUM), parent of Taco Bell, KFC and Pizza Hut, are both more moderately priced and yield dividends. These two companies share the increasingly difficult task of delivering improved results while maintaining profit margins. The increased costs of commodities will hurt these and other food business across the country.
McDonald's reported strong results across all business segments worldwide for 2011. Revenue, operating income and earnings per share were all up from 2010. Global comparable sales increased by over 5%, with a positive gain in every geographic segment. The company improved earnings per share on a quarter and full year basis, which rose by 15% in the fourth quarter over last year. European growth was led by the UK, Germany and Russia. No mention of the PIIG countries was in the report. McDonald's is planning on opening over 1,500 new stores in 2012 and continues implementing its "Plan to Win." This is the company's plan to increase sales and market share by focusing on the customer experience and value.
McDonald's stock is currently trading around the $100 mark and yields about 2.8%. The stock has been making all time highs for the past two years and is looking over-extended. The company is exposed to global economic conditions and may suffer negative impacts from the European recession and slowed expansion in China. The momentum has turned bearish in expectation of weakness in 2012. I expect to see McDonald's retreat to its support level between $90 and $95 before making any decisive moves up or down. McDonald's long history of growth and its new commitment to assert global leadership will keep investors interested and will ultimately determine the direction shares take. The dividend and historical data will trump Chipotle's explosive growth, making McDonald's a better choice.
Yum Brands has been trending up since its 2011 lows. Long term momentum is strong, but short term indicators are weakening and suggest a correction is on the way. This company is also exposed to global conditions, conditions that will affect income and profitability in 2012. Fourth quarter earnings are expected this week, with that average analyst estimate for earnings of $0.74 per share, up from last year's $0.63. Investors will be carefully scrutinizing the statement for any indications or expectations of weakness going into 2012. The stock currently trades around $63 and yields about 1.8%
The fast food industry is a fast money industry. The trend of stellar performances by Chipotle, McDonald's and Yum! Brands will not reverse. These companies are masters of growth and have proven business models. The sector is a good buy but only at a reasonable valuation. Buying opportunities will present themselves as global conditions play out and allow for better dividend yields.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.