Chipotle vs. Panera: Battle of the Fast Casual Restaurants

by: Jefferson Starship

One of the biggest stories of the last week was Apple's (NASDAQ:AAPL) drop below their 200 day moving average. This was quite significant since it showed some wavering faith from investors. It also spurred a number of articles regarding other companies who have been able remain above this mark. Two of those companies are Chipotle Mexican Grill (NYSE:CMG) and Panera Bread Company (NASDAQ:PNRA) of the fast-casual restaurant industry. A year ago I examined each of these companies as part of a larger review of the entire restaurant industry, here, rating them each very highly.

There should be room in any portfolio for some sort of restaurant, whether it be a fast-food with a safe dividend like McDonald's (NYSE:MCD), an international growth pick like Yum! Brands (NYSE:YUM), or a sit down casual restaurant chain like Darden (NYSE:DRI), which also has a nice dividend. When looking for a riskier play, you could take a shot in the dark, like Wendy's/Arby's (NYSE:WEN), or you could invest in companies with plenty of room to grow, which are doing so extremely prudently.

As mentioned, Chipotle and Panera are fast-casual restaurants, meaning you still order at a register but they are certainly a step above fast food restaurants. They offer a classier ambiance and better, albeit pricier, menu choices. It should be noted that this design is not going overlooked by the fast food players. McDonald's has been renovating its units by adding fireplaces, cushioned seats and other pieces that make the restaurants closer resemble these fast-casuals and Starbucks (NASDAQ:SBUX).

With that being said, both Chipotle and Panera have well under 2000 units. This is a big deal because it means that they have so much more room to grow. The speed in which this growth occurs is going to affect their stock price and will offer up juicy opportunities for investors. In picking between the two it may come down to simply personal preference, however as explained below, I feel that Chipotle is the smarter play right now. As an FYI, both of these companies will be reporting their second quarter results next month.

Panera operates retail bakery-cafes. What this means is that they have really good sandwiches because the bread is their specialty. They also offer bread-bowl soups and delicious smoothies. They are more susceptible to changes the price of wheat and flour and obviously less susceptible to price of meat. A few months ago I outlined how some these big restaurants were dealing with this rise in commodities cost and how it really should not cut into their profits too much. Panera's first quarter saw a rise in income of 27% and revenue up 16%. They currently have just under 1,500 units, about 800 of which are franchised (this will be become a bigger factor below). They planned on opening another 27-29 this quarter.

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As you can see in the graph above, Panera has been in a 5-month hiatus from growth, trading between $115 and $130, and at $121 right now. They are still well above their 200 day, but not by as much as they were prior to the last 5 months. Their price-to-earnings is at 31, which is not bad for a growth stock like this and is much lower than Chipotle's. A nice tidbit about their financial status is that they are sitting on $250 million in cash with stable liabilities and no long term debt. Picking up Panera right now would not be a terrible idea but again, I personally think Chipotle is better.

Chipotle sells burritos and tacos, but these are no Taco Bell burritos and tacos. These come with much fresher ingredients and are grilled so they are healthier, if consumed in moderation, of course. I first reviewed Chipotle exactly a year ago, here, saying to be wary of an entry price but ultimately calling it a buy. A year later, I still think this stock has room to grow. Their revenue was up 24% last quarter and income was up 22%, with sales rising 12.4%. One factor explaining why Chipotle's revenue growth is close to their income growth, whereas Panera's is not, is that Chipotle has been better suited at controlling their costs.

Also, all 1,095 of their units are company owned. Chipotle refuses to franchise stores, which means that they are responsible for doing the required market research prior to choosing a location. This means that their hits or misses are on them, rather than some outside owner, and so far there have been a lot of hits. They know what they are looking for when they go to open a restaurant and that is reassuring for stockholders.

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The graph above shows that Chipotle is also well above their 200 day moving average, but like Panera, the gap has been closing. This could have been caused by a number of factors, a huge one being the awful last two months the Dow has endured. I would expect this gap to increase after earnings are released on July 19. They planned on opening 140 stores this quarter so we will see if this has been achieved.

Chipotle's price has still been on the up and up, currently at $284. Their price-to-earnings is 48, but this is certainly warranted as investors are willing to pay for certain future growth. They are also sitting on a lot of cash, $282 million and not too much in liabilities. Taking all of that as a whole you have an excellent stock with room to grow. I personally pick Chipotle over Panera, first because their food is healthier and who knows, the new presidential dinner plate initiative may actually have some effect on American diets; and second because of their refusal to franchise. They understand their growth potential and do not want to rush it by allowing just anyone to open a store. This is admiral and proves the strength of Chipotle's ownership.

Disclosure: I am long MCD.

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