Stock of the Day - January 7, 2009

Chipotle Mexican Grill

Chipotle Mexican Grill (CMG) operates fast-casual restaurants, serving fresh Mexican food that many of you eat regularly and love.  As of September 30, 2008, Chipotle operated 797 locations in the United States and 1 location in Canada. 

The chart of Chipotle’s stock price looks like a giant and steep mountain.  The company, which started being publicly traded at $44 per share in January 2006, reached its all-time high of $152.36 in December 2007.  Since its high, the company’s stock price has steadily declined to its current price of $58.10.  The question now is, does the fact that the company is trading at almost one-third of its high indicate that it is cheap and should be bought?

The case for buying Chipotle lies in the story of the company’s growth.  The number of Chipotle restaurants increased at a 26% annual rate between 2002 and 2006.  In 2007, the company opened 125 more stores, translating into a 22% growth rate.  Just this past year in 2008, the Mexican-food chain opened between 130-140 more restaurants, and it opened its first restaurant in Canada.  The company plans to continue its aggressive expansion in the United States in 2009, but it has also stated that it will build more stores in Canada.  But, just recently, Chipotle released a statement showing a keen interest in expanding into London in the near future.  With a high level of growth in the United States and new channels of growth from both Canada and Europe, this company will continue to expand. 

Not only is Chipotle growing the number of stores it operates, but it is also growing the sales at existing restaurants.  During the 2003-2007 period, average restaurant sales increased at an 8.1% annual rate.  This means that every year, each Chipotle restaurant saw 8.1% more customers coming through its stores than the previous year. 

The case against Chipotle stems mostly from macroeconomic concerns and from higher food costs.  Chipotle is famous for serving fresh food and high quality products.  While this strategy of serving quality food attracts many customers, it comes with a steep price.  Prices for organic beef, chicken and pork have risen sharply in the past year, and this increase in food costs will hurt the restaurant’s profit margins.  In terms of macroeconomic effects on Chipotle, it has been very hard for the company to keep sales growing at a high rate when it is competing with fast-food companies such as Taco Bell and McDonalds.  People just do not have the money to regularly spend $7-$8 on a burrito when they could be eating one for $0.89 from Taco Bell.

I would rate Yum Brands (YUM), the company that owns and runs Taco Bell, Pizza Hut, and Kentucky Fried Chicken, as a much better investment than Chipotle.  YUM is aggressively expanding into China and is doing extremely well so far.  In addition, with the economy being the way it is, a company like YUM that sells cheaper products than Chipotle just seems more logical. 

So, while a burrito from Chipotle might taste better to you than an 89-cent burrito from Taco Bell, the better investment for now is definitely Yum Brands. 

 

Niki Pezeshki

College Trillionaire