Image Source: Chipotle (page 89 of 160)
In late April of this year, we added Chipotle to the simulated Best Ideas Newsletter portfolio.
By Brian Nelson, CFA
We like Chipotle (CMG) for three primary reasons: 1) in CEO Brian Niccol, the company has a new bold visionary at the helm and he is hiring top talent to fill gaps, 2) buyouts in the restaurant space will only offer support for shares as the fast-casual segment remains a key focus area for private equity (here and here), and 3) Chipotle has been plagued with so many health issues (“foodborne illnesses”) in the past that, even with the recent bounce in shares, the market’s expectations are still rather low. Though our fair value estimate of Chipotle does not reflect a surge in expected same-store-sales performance or the launch into the breakfast daypart, we like the refreshed executive team that has innovation running in its blood, and we think it will be able to position the company effectively over the long haul.
It’s been a while since there’s been bad news at the burrito-making giant, and as we’ve seen with past food sourcing issues at Yum! Brands (YUM) and McDonald’s (MCD) in China, consumers are either forgiving or forget, and that means they often come back. We don’t think Chipotle has alienated its core customer base, and we think the lull in bad news may be a good thing once momentum starts to return to same-store sales. The game at Chipotle will be one of share capture, and we think menu innovation will be key. For example, comparable store traffic across the restaurant space fell 2.9% during the month of May, according to data from TDn2K, a further deceleration from the -2.1% rolling 3-month average. Chipotle’s New York test kitchen has been very active in coming up with new menu items (Quesadilla, Avocado Tostada, Mexican Chocolate Shake).
The company’s first-quarter 2018 results, released in late April, showcased 7.4% revenue growth, comparable store-sales increases of 2.2%, restaurant operating-margin improvement of 180 basis points, and considerable net income and diluted earnings-per-share expansion. For the full year, Chipotle expects comparable restaurant sales to advance in the low-single-digits and for new restaurant openings to be in the 130-150 range. Chipotle looks well on its way to a healthy recovery. The high end of our fair value estimate is nearly $600.
Restaurants – Fast Food & Coffee/Snack: ARCO, DPZ, DNKN, JACK, MCD, PZZA, SONC, SBUX, WEN, YUM
Related stocks: YUMC, CHUY, QSR, BLMN, DFRG, HABT, NDLS, BOJA, LOCO, TACO, KONA, PBPB, WING, SHAK, FAT, ARKR, LUB
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.