This Restaurant Chain Keeps Growing

This Restaurant Chain Keeps Growing

Many investors were scared away from Chipotle Mexican Grill when David Einhorn, the famous hedge fund manager, disclosed Chipotle as one of his biggest shorts in October of last year. Interestingly, since the beginning of this year, Chipotle has risen more than 71% on the market, significantly outperforming both McDonald's and Yum! Brands . McDonald's year-to-date return was only 7.92%, while Yum! Brands stayed flat in the past ten months.

Impressive operating performance
In the third quarter, investors must have been quite satisfied with Chipotle's operating results. Comparable-restaurant sales rose as much as 6.2%, and the diluted EPS experienced a 17.2% year-over-year growth to $2.66 per share. The comparable-restaurant sales growth was due to increased customer visits, supported by its marketing campaigns and faster throughput. With its strong third quarter results, Chipotle raised its full year comp guidance from low to mid-single-digits to mid-single digits.

Introducing healthy eating habits
One of the ways that Chipotle attracts customers is its innovative healthy food items. Recently, Chipotle has introduced Sofritas, the organic artisan tofu, which could be considered a vegan option for customers. Sofritas has become available in several states, including California, Washington, Colorado, and Utah, covering around 25% of its total restaurant count. If Chipotle customers like it, the company expects to have Sofritas in more than 650 restaurants, accounting for around 40% of its total restaurant count by the end of this year.

To promote healthier dining lifestyles, Chipotle has also been gradually expanding its new concept ShopHouse Southeast Asian Kitchen, which offers gluten-free, dairy-free Asian dishes. Currently, the company has three ShopHouse restaurants. Steve Ells, Chipotle's chairman and CEO, commented that ShopHouse is growing much faster than Chipotle was in the early days. Chipotle believes that ShopHouse and the company's international market expansion are its two most important sources of long-term growth.

Yum! Brands and McDonald's are also shifting to healthier food items
Yum! Brands, the owner of Taco Bell, Pizza Hut, and KFC, has also introduced healthier eating concepts to consumers. The company has recently launched its new restaurant format, named "KFC eleven." While the traditional KFC restaurants offer fried chicken, KFC eleven gives consumers healthier and fresher options including rice bowls, salads, and grilled chicken.

McDonald's is also providing new offerings. The company has already offered a choice of grilled chicken instead of fried in its flour tortilla wraps. It now intends to change its menu in 20 of the company's biggest markets, representing more than 85% of its total sales, to adapt with the world's growing healthier tastes. The change in menu seems to take a lot of time, however. McDonald's estimates that it might take at least three years to cover around half of the total restaurants in those markets.

Because of its impressive operating performance, Chipotle is valued quite expensively on the market. At nearly $510 per share, the market values the company at as much as 51.6 times its trailing P/E. Yum! Brands has a lower trailing earnings valuation at 27.9. McDonald's is the cheapest with around 17.4 times its trailing earnings. Income investors might prefer McDonald's as it offers the highest dividend yield at 3.40%. Yum! Bands ranks second with a 2.20% dividend yield. Chipotle does not pay any dividend.

My Foolish take
With innovative food products, a new restaurant concept focused on healthier eating, and the potential for international expansion, Chipotle could experience significant growth in the future. However, it is already quite richly valued on the market. Its earnings growth valuation (PEG ratio) has already reached 2.26, indicating that it is overvalued compared to its expected potential growth in the next five years. Personally, I would rather wait for the price to contract before initiating a long position in Chipotle.

These aren't the only stocks that are taking over the world
Profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

The article This Restaurant Chain Keeps Growing originally appeared on

Anh HOANG has no position in any stocks mentioned. 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published