6 Things To Consider Before Investing In Chipotle Stock

  • Chipotle Mexican Grill’s “food for integrity” philosophy highlights the company’s emphasis on public relations.
  • Chipotle Mexican Grill remains customer and stakeholder focused.
  • Chipotle Mexican Grill sports solid fundamentals and a strong balance sheet.

Fast casual Mexican restaurant chain Chipotle Mexican Grill (NYSE:CMG) experienced a great deal of growth over the past five years. The chain nearly doubled its location count since 2010. In addition, Chipotle Mexican Grill’s management knows how to boost sales at its established locations. Despite the recent correction due to an E. coli scare, the company’s stock returned 129% versus 70% for the S&P 500 (see chart below). Let’s examine the company's qualities.

Chipotle stock price vs S&P 500 5 year returns

CMG-price-chart

Source: amigobulls.com

Public relations masterminds

Chipotle Mexican Grill operates in the tough and competitive restaurant industry. Consumers are presented with many options when they go out and eat. The “food with integrity” approach represents a way that Chipotle Mexican Grill separates itself from the pack. The company wants to serve wholesome food without chemical additives, hormones, etc.

Company management believes so strongly in serving quality food that they sometimes forgo purchasing food supplies that don’t meet their standards. For example, in the most recent quarter Chipotle Mexican Grill stopped selling carnitas in at least some of its restaurant due to an inability to source pork from a vendor that met the company’s standards. The company began resupplying its restaurants when it found a supplier in the UK that was up to par.

Also, Chipotle Mexican Grill not only wants to market to consumers but educate them under the guidance of its “people culture” viewpoint. It wants the consumer to understand that it serves a quality product and where it comes from. The underlying intention is to change the consumer’s mind on restaurants and companies in general that source food from vendors that treat their food with hormones, drugs and chemicals.

It is Chipotle Mexican Grill’s hope that customers, enlightened by the company’s feel good story on animal welfare treatment and the fact that it serves food perceived to be healthy, will eat at its restaurant. Chipotle Mexican Grill takes an upbeat, creative approach to conveying its stories such as the drawings and stories on its cups.

Stakeholder focus

Chipotle Mexican Grill’s management exhibits a stakeholder focus. Chipotle Mexican Grill wants its No. 1 stakeholder, the customer, taken care of. For example, Chipotle Mexican Grill wants to make better use of its “second make” line for its take out customers, which would lessen the wait for customers as a whole. The take out customers are not clogging up the lines for the customers who order within the store.

The company wants its customers served by “high performers”, giving indication that the company holds employees to high standards. Chipotle Mexican Grill also provides carrot sticks to employees to gravitate into management, allowing them to aspire to “restaurateur” status. Moreover, Chipotle Mexican Grill recently hired a technology officer from Starbucks (NASDAQ:SBUX) that should help with things such as expanding mobile ordering, which should help with customer convenience.

Chipotle Mexican Grill’s popularity translates into goodwill among its landlords and potential landlords. This gives Chipotle Mexican Grill leverage in negotiating deals with them. Landlords trust the restaurant chain, according to company management.

Chipotle Fundamentals

Chipotle Mexican Grill’s commitment to product quality has translated into excellent fundamental expansion. Over the past five years, Chipotle Mexican Grill’s revenue, net income and free cash flow expanded 171%, 250% and 200%, respectively. So far this year, the company’s revenue, net income and free cash flow expanded 15%, 26% and 5%, respectively, year-over-year. However, year-to-date same store sales growth came in at 5.5% versus 17% the same time last year. Management hinted that employees can lose focus on pushing throughput at times. Lower comps can be expected as the company further penetrates the market.

Solid balance sheet

Chipotle Mexican Grill maintains an excellent balance sheet. In the most recent quarter, its cash balance registered at $604 million, 25% of an expanding stockholder’s equity base representing a solid position. The company possesses no long-term debt, which can create profit choking interest.

High valuation despite correction

While Chipotle Mexican Grill trades 24% off its high due to the recent E. coli scare, the P/E ratio still resides at 35 (see chart below). Relatively speaking, this represents the second lowest point in five years. However, it could go lower if the scare persists.

CMG-pe-ratio-chart

Source: amigobulls.com

The E. coli scare could serve as a drag on Chipotle Mexican Grill’s fundamentals and subsequent stock price, taking the wind out of the company’s public relations sails. A Reuters article makes this astute observation:

“The outbreak also speaks to changing consumer tastes. U.S. Diners are demanding more fresh, less processed foods. While such products are generally healthier, cooking and other types of processing can kill pathogens that make people sick.”

Long-term future looks bright

Chipotle Mexican Grill’s future remains bright due to its continued commitment to product quality. The company plans to step up its international expansion. It is expanding its ShopHouse Asian restaurant and its Pizzeria Locale’s pizza business. Technology expansion should also help cater to consumers’ increasing preference for ordering online.

Conclusion

Enterprising investors may want to take advantage of this discount in Chipotle stock price. Investors should buy more if it corrects further. Investors should be prepared for a little more volatility over the next 1-3 years both on the fundamental and stock price fronts. However, eventually consumers will regain trust in the company barring any more food infractions. Finally, Chipotle stock remains a good investment for the long-term.

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