Chuy's Mexican Food Is A Spicy Alternative To Chipotle

| About: Chuy's Holdings (CHUY)

Summary

A small cap stock growing at 31% can provide large gains in a scary 2016 market.

With Chipotle feeling the burn from the extended E Coli PR fiasco, other Mexican restaurants will benefit.

The company's financials offer a lot more than just growth.

Chuy's Holdings Inc. (NASDAQ:CHUY) is a small cap restaurant stock that is growing rapidly. The Mexican restaurant has been on a tear over the past year putting up some solid growth numbers and with a market cap of only $560 million, presents the possibility of massive growth for the enterprising investor. While the stock market is roiling with high levels of fear and uncertainty, CHUY's most recent earnings report posted 15% quarterly YoY revenue growth and phenomenal 31% earnings growth. With a PEG ratio of 1.54 and a forward P/E around 30, the company is growing rapidly but priced relatively conservatively compared to other growth stocks.

One of CHUY's biggest competitors, Chipotle Mexican Grill (NYSE:CMG), has taken a beating for the recent E. coli scare that caused a national sensation as several customers became sick from the restaurant's food. Chipotle's pain may be CHUY's gain as customers food safety fears keep them away from the up and coming chain's restaurants. CMG's stock has taken a beating falling from a high of $754 a share in August to only $472 today, representing a total decline of nearly 40%, a staggering loss. As CMG customers find their way to CHUY's restaurants, sales will be bolstered even more than they already are by increased spending from low gas prices.

With Saudi Arabia, the largest oil producer in OPEC, recently announcing that they will continue to produce oil at high levels despite the global over-supply, prices continue to decline. The more oil prices decline the more consumer discretionary spending increases. In fact, research shows that consumers in America spend up to 80% of their gas savings and the largest portion of this money is spent at restaurants. It is estimated that the average American spent over $2000 a year on gas before the decline in prices over the past year. If the statistic above is true that we spend 80% of our gas savings and most of that goes to restaurants, then the average person is spending over $1000 year at restaurants, a substantial figure.

The average restaurant has pretty low margins, which they have to make up for with lots of traffic and sales. Depending on the type of restaurant, the average margin ranges from only 2-6%. So CHUY's 5.92% margins are better than they look to an investor not that familiar with restaurant stocks. And its return on equity is also a very good 12%, so even though the company is still in its early growth phase, its financials are strong and with CMG still reeling from the E. Coli scare, CHUY should pick up a lot of their business.

The only real concern with this stock is its valuation. Trading at around 30 times forward earnings, it might look a little expensive. But not many companies outside the tech space are growing at such a fast pace and trading under 30 times earnings. Starbucks (NASDAQ:SBUX), which is growing more slowly than CHUY but still trades at 32 times earnings is being heralded by analysts and investors as a top pick even though its not growing as fast as CHUY and both are in the consumer discretionary space even if they don't compete directly.

In conclusion, as gas prices remain low there will be continued increasing sales in the restaurant sector, which CHUY is benefiting from directly. The brand is clearly resonating with consumers based on recent growth and there is no reason to expect this will not continue. With such a small market cap the sky is the limit in terms of how much the company can grow and with so many tailwinds at the moment there is really no reason to believe it will not continue to expand and reward shareholders who are lucky enough to have found this diamond in the rough.

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

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.