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Investors have finally started abandoning Chipotle Mexican Grill (NYSE:CMG) after Friday's disappointing second quarter earnings. Shares of Chipotle Mexican Grill dropped 21.5% to close at $316.98. Shares now sit 28% off their 52 week high price of $442.40. So investors are left wondering whether this represents a buying opportunity for this once fast growing chain, or the sign of poor results to come.

Chipotle saw revenue grow 20.9% to $690.9 million in the second quarter. Net income rose to $81.7%, up 61.2% from the previous year's second quarter. Earnings per share were reported as $2.56, up 61% as well from the previous year. The earnings per share beat analysts' predicted $2.30 target.

Comparable same store sales for locations open more than a year were reported as 8%. This mark fell short of the double digit increase analysts were expecting. The 8% increase also falls short of quarter one, which saw comparable sales up 12.7%. These same store sales growth numbers are great for the restaurant industry, but when they fall below the double digits expected, shares don't command the high price to earnings multiple anymore.

Here is a comparison between Chipotle Mexican Grill and other publicly traded Mexican food companies Taco Bell (NYSE:YUM) and Qdoba (NASDAQ:JACK). I also threw in McDonald's (NYSE:MCD), the largest restaurant company in the United States, for price reference.

Stock PriceCurrent P/EForward P/EPrice/Sales (NYSE:TTM)Dividend
McDonald's$91.5815.914.93.443.1%
Chipotle$316.9835.328.95.10NA
Jack in the Box$27.1019.017.00.56NA
Yum Brands$64.9519.917.42.271.8%

I know I'll get criticism for using these two restaurants to compare to Chipotle. After all Chipotle is a pure play on Mexican style food, versus Yum Brands' ownership of three unique brands (Taco Bell, Pizza Hut, KFC), and Jack in the Box also owning its flagship brand. I also am aware that Chipotle has strong customer loyalty as it offers natural food using the strictest policies. This article is to recommend that investing in Chipotle isn't as prestigious as it once was. The stock now commands too high of a valuation and investors would be better served looking elsewhere. Here is a look at my two picks:

Jack in the Box - In June I recommended buying shares of Jack in the Box, the owner of Qdoba and Jack in the Box restaurants. The company has 2847 restaurants, with the majority (2242) of those being Jack in the Box stores. The main reasons to buy Jack in the Box shares are:

  • Bank of America raised price target to $32
  • Strong franchise ownership of Jack in the Box restaurants (73%), giving the company a steady stream of revenue to open additional stores.
  • Qdoba's rewards program and catering as additional revenue sources
  • Long term goal of 2000 Qdoba restaurants, more than tripling its current base
  • Company guidance of earnings per share of $2.00 by 2015

I also recommended Yum Brands recently after the rollout of its Cantina Bell menu. Taco Bell makes up less than half of sales but has seen its United States same store sales grow. While many investors are getting into YUM for its Asian exposure with strength in its KFC brand and Pizza Hut brands overseas, I argued for Taco Bell gaining steam domestically. The company's Doritos Locos Taco has helped increase sales and has Taco Bell partnering with Pepsi (NYSE:PEP) to expand additional Doritos flavored options on its menu. Here were some of the highlights for an investment in Yum Brands:

  • Doritos Loco Taco hits 100 million sold in 10 weeks, making the most successful launch in company history
  • Bringing Hot and Spicy Doritos versions of new tacos
  • Cantina Bell rollout from famed chef Lorena Garcia
  • Test stores of Cantina Bell saw increases in lunch and dinner sales. The company also reported an increase in female patrons
  • Taco Bell introduced breakfast menu offerings in 10 states and is rolling out its "First Meal" menu in 750 locations soon
  • Acquisition of Little Sheep in China

In the second quarter, Chipotle Mexican Grill opened 55 new restaurants, bringing its total to 1316 Worldwide. The company opened its first store in Paris and continues to put a focus on expanding internationally. This fiscal year calls for 155-165 new Chipotle restaurants to be opened. In September, Chipotle opened its first ShopHouse restaurant, a new brand that focuses on Asian cuisine. The location was opened in Washington D.C. and is the only ShopHouse open to date. I keep hoping on one of these calls or during an investor presentation, Chipotle will detail further plans for the brand.

Chipotle Mexican Grill shares were also hit hard Friday by analysts. Goldman Sachs removed the stock from its Conviction Buy List, and other firms like Janney and Deutsche Bank downgraded the stock as well. I think more analysts will follow and I also join in by saying to sell Chipotle shares. Shares now trade with a forward price earnings ratio of 29. This used to be relatively cheap for a large growing company. I just can not see Chipotle hitting its revenue and earnings targets with higher commodity costs coming. Shares of Chipotle would look enticing for me at 25 times next year's earnings, giving a price target of $274. Chipotle also has ongoing SEC investigations concerning its hiring processes that could lead to fines and reinstating earnings releases.

Chipotle will continue to grow its store count across the United States and expand internationally. However, shares do not look as cheap here as Jack in the Box, Yum Brands, or even McDonald's. If you're looking for restaurant exposure in your portfolio, buy shares of Jack in the Box or Yum Brands. If you are holding shares of Chipotle, you could see shares bounce upwards on Monday and that would be the time to sell.

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

Source: Chipotle Investors Would Be Better Served By Yum Brands, Jack In The Box