After Earnings, Is Chipotle Still the Best Restaurant Option?

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Chipotle Mexican Grill has soared in the double-digits since it reported earnings last week. The company operates in the same fast-casual restaurant space as Potbelly and Noodles & Company , but does it present more value?

What separates Chipotle from peers?
Over the last five years, Chipotle's stock has surged an incredible 1,030% as the company has become one of the largest restaurants by market capitalization in the market. The reasons for its success during this period are plentiful, but they can be traced back to three core explanations.

1. Chipotle was one of the first fast-casual restaurants and really formed the business model for the segment, which is growing three to five times faster than any other segment in the restaurant industry in any given quarter.

2. Product Innovation: Chipotle continues to add new foods to its menu, and it has successfully grown beyond Mexican food into Asian food. It is now bringing its fast-casual business model to the pizza industry. Thus, Chipotle's growth has never been an issue.

3. Organic and healthy focus: Many thought healthy consumption was a fad, but it has proven to be a long-term lifestyle that Chipotle's peers are now racing to satisfy. Chipotle saw this trend coming, and it has positioned its menus to meet this need.

These three reasons really set Chipotle apart, even from its fast-casual peers.

Growing faster despite being larger
Noodles focuses on pasta while Potbelly operates sandwich shops.

Noodles recently gave preliminary fourth-quarter results, guiding for comparable-sales growth of 3.9% and total revenue growth of 17.4% due to company-owned and franchise store expansion. 

Potbelly hasn't announced preliminary fourth-quarter results, but in the third quarter the company saw revenue growth of 11.7% while comparable sales grew just 2.5%. 

Now, it's important to keep in mind that Chipotle is more than 10 times larger than either of these two peers. Hence, as a company grows larger its year-over-year percentage growth almost always slows. Yet, in Chipotle's last quarter, revenue grew 20.7% driven by a 9.3% gain in comparable sales, which is something we haven't seen in a long time. 

As a result of increased comps, Chipotle's operating margin increased 100 basis points to 25.6%, which is far superior to Noodles's 5.8% and Potbelly's 4.1% operating margins. Thus, Chipotle is not only growing faster than peers, it is doing so more efficiently, which shows that it's a company that's truly clicking on all cylinders.

Is it worth the premium?
With all things considered, we know that Chipotle is growing faster than any restaurant peer, and that its margins are impressive. Yet, the big questions surrounding this company are if its gains have come and gone, and whether it's too expensive?

At 5.25 times sales and 33.88 times next year's earnings, Chipotle is more expensive than the average restaurant company. However, it has something the "average" restaurant is lacking, and that of course is growth.

With that said, McDonald's might be a good reflection of the entire industry, as the largest restaurant in the market.

McDonald's trades at 15 times future earnings and 3.3 times sales, which is clearly cheaper than Chipotle. Yet, the difference is that McDonald's is essentially seeing no growth. The company announced fourth-quarter results back on January 23 with flat comparable-store sales. 

Therefore, McDonald's might trade at a 50% discount to Chipotle, but the latter is growing about 20 times faster! For most investors, this ratio favors Chipotle.

Final thoughts
When deciding on where to invest in the restaurant space, your decision ultimately comes down to your goals.

If you want to own a company that you perceive as cheap then McDonald's might be for you. If you're looking for the next Chipotle then you might want to entertain Noodles or Potbelly.

However, there's a catch: Noodles and Potbelly will likely never become Chipotle, based solely on the growth levels of these companies. Chipotle was doubling its sales when it was the size of these two peers.

Then, given consumer trends and Chipotle's room to expand and willingness to venture out into new businesses, combined with McDonald's unhealthy menu, Chipotle might actually serve as a safer investment. Essentially, Chipotle could become the next McDonald's, and McDonald's will likely continue to struggle fundamentally due to market saturation and its fat-filled menu.

Hence, Chipotle is a rare restaurant that seemingly can't be stopped. Given its performance, we might conclude that Chipotle is more than worthy of its premium, and that it's far from reaching a fundamental peak.

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The article After Earnings, Is Chipotle Still the Best Restaurant Option? originally appeared on

Brian Nichols owns Chipotle. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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