The surprising news yesterday was that Chipotle Mexican Grill (NYSE:CMG) is in the initial stages of developing a burger chain. Whether anything ever comes of the concept, the stock will likely never benefit from what is now the fourth chain in the family.
The news was triggered by Chipotle filing for the "Better Burger" name with the U.S. Patent and Trademark Office. With a market cap of $14 billion and already developing the ShopHouse and Pizzeria Locale concepts one has to wonder if a move into burgers offers any real opportunity.
While Bloomberg points out that burger chains generated revenues of $77 billion in 2014 in comparison to only $20 billion for Mexican food, the category is far more crowded with established and respected chains already in the premium sector.
In the premium market, both Shake Shack (NYSE:SHAK) and Habit Restaurants (NASDAQ:HABT) are already public with huge head starts on Chipotle. In addition, private Five Guys, In-N-Out Burger, and Smashburger already have large presences that together cover most of the U.S. By the time, the "Better Burger" concept gets off the ground, any location in the U.S. would immediately have well-established competition.
At the same time, Chipotle still needs to prove the company can provide better Mexican food in a healthy manner. If anything, beef is a more difficult food item to prevent diseases.
Despite all the excitement over Shake Shack, the premium burger concept is only worth $1.35 billion. The company opened a permanent kiosk back in 2004 and has reached around 50 company-owned locations with revenues slightly below $200 million last year.
In the case of Habit Restaurants, the concept started a long time ago. The mostly California based burger chain had over $230 million in revenue last year with around 150 locations. The stock is only worth $500 million now.
Even with the recent health scares, Chipotle had revenues of $4.5 billion last year. As well, the Mexican concept has over 2,000 locations and plans to add over 220 this year.
On top of that, the ShopHouse and Pizzeria Locale concepts are already expanding. If anyone needs an example of how a newer burger concept isn't likely to impact Chipotle stock for over a decade if not ever, the ShopHouse opened the first location in 2011 and is hardly even mentioned when discussing the stock. Chipotle ended the year with 13 locations and didn't even discuss ShopHouse during the Q4 earnings call.
The quickest way to value creation is for Chipotle to recapture the $300 per share and nearly $9 billion in market value lost from the peak due mostly to the health scare at the namesake locations. In addition, the company will open far more Chipotle stores in the years ahead. Heck, the company will open more Chipotle locations this year than Shake Shack and Habit have open now.
The magnitude of the numbers suggest that any time and money the company spends on a burger concept are practically wasted. It has only taken a few Chipotle stores with health scares to bring down the burrito chain that 100s of burger locations built over the next decade could never over come.
Clearly, the impact of a new burger concept is more to Shake Shack and Habit Restaurants than to Chipotle. Another player in the burger sector would impact the established players more than a concept that would trade above $20 billion now if not for a health scare.
The news makes me ever more concerned that Chipotle Mexican Grill is losing focus on the market that brought the stock a large valuation. The last thing the company needs is another concept distracting the management team from the golden goose. Especially considering, the other concepts aren't even proven at this point despite years of development.
My recommendation stands that the stock is overvalued at the current price. My previous thought was to avoid Chipotle until a better price emerged and the health scare lapsed. Now my concern is that management isn't properly focused on overcoming the damaging health concern. If any more signs emerge that Chipotle is moving forward on the burger concept, my interests in the stock will completely evaporate.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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