Burrito Giant Primed for Future Growth

Some investors may say that Chipotle is overvalued with a price-to-earnings ratio north of 60 and a five-year stock price increase of 550%. But in my view, this stock has plenty of room to run.

New frontiers
With 1,230 units, Chipotle lacks the "every street corner" ubiquity of fellow fast-food giants such as McDonald's. However, its lack of presence is exactly what makes Chipotle such a promising stock.

Chipotle has room to expand to many untapped markets at home and abroad, and with virtually no debt and solid free cash flow, this company is in a prime state to expand. The company's 2012 suburban-focused plan to open 155-165 new units demonstrates this. Given that many believe Chipotle's saturation rate is closer to 3,000 units, this growth and expansion could continue for some time.

Across the pond, Chipotle recently opened two test units in London, showing that the company is tentatively dipping its foot into the international market. If these units produce good numbers, you can expect the growth abroad to increase drastically over the next five years.

Light-years ahead
One of the fears that comes with the unit expansion of Chipotle is the worry that the quality of the brand will decline. I highly doubt this. Steve Ells, the founder and CEO of Chipotle, is far too passionate to let his culinary dream be compromised.

More and more people are jumping aboard the organic-food bandwagon and what better way to support that than an environmentally conscious fast-food restaurant? For those who scoff and call healthier eating a fad, the performance of Whole Foods, The Fresh Market, and the huge IPO pop of Annie's should counter any doubt.

Rising food costs are one big threat to many fast-food operators. According to Barclays Capital, Chipotle believes commodity inflation will top 5% this year. The good news for consumers is that the company doesn't intend to raise prices. Looking through an investor's lens, though, this could result in squeezed margins going forward.

Slight distraction
Chipotle recently made a splash with the opening of its new ShopHouse Asian restaurant in Washington, D.C. Based on the Chipotle model, the company hopes that ShopHouse will be able to exhibit the same simplicity that is so attractive in the current Chipotle restaurants.

In my view, starting a new project right now is a mistake. Chipotle is already sitting on an undersaturated, proven restaurant, and it does not need a distraction like ShopHouse during such an optimal time for Chipotle expansion.

The time to focus on ShopHouse is five years from now, and Chipotle is making a mistake if it decides to expand this brand beyond the two restaurants in D.C.

Results speak for themselves
Do not listen to the naysayers when it comes to Chipotle. While Chipotle is not a revolutionary giant, there is a reason the market values this fast-casual restaurant brand so highly.

The market recognizes Chipotle's unit growth potential and innovative restaurant plan, and should reward any successful action taken to fulfill that potential.

At the time thisarticle was published Matt McJunkin does not have any stake in any stock mentioned in this story.The Motley Fool owns shares of Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended buying shares of Chipotle Mexican Grill and McDonald's.Motley Fool newsletter serviceshave recommended creating a bear put spread position in Chipotle Mexican Grill. The Motley Fool has adisclosure policy.

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