Beans, rice and riches abound for Chipotle

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The search for the “next big thing” can lead you down a rabbit hole. But sometimes you don’t need to find a cutting-edge, complex, or speculative stock to generate solid returns.

Chain of friendly Mexican restaurants Chipotle Mexican Grill (GCM -1.12%) sells burritos, bowls and salads in more than 3,000 stores in the United States, Canada and Europe.

There’s nothing about beans, rice, and guacamole that others can’t replicate, so how has Chipotle thrived since its founding in the 1990s? More importantly, what does the future hold for investors? The answer is below.

Image source: Getty Images.

Execution Excellence

The catering sector is tricky; about 60% of them close their doors before their first birthday. There’s nothing exclusive about burgers, coffee or burritos, but companies like Starbucks, McDonald’s, and Chipotle continue to grow. Why? It comes down to strong brands and ruthless execution. Once a company has built a system to replicate what works, it’s just a matter of “rinse and repeat.”

Judging from its success, Chipotle has apparently built a positive reputation among its customers for its tasty dishes with fresh ingredients at an affordable price. It owns its stores, supporting them with purchasing power over ingredients and logistics that grows stronger as the company builds more stores. This “system” keeps costs down and local restaurants may struggle to compete.

CMG (TTM) Revenue Chart

CMG Revenue (TTM) data by YCharts.

You can see in the graph above how revenue and free cash flow have steadily increased almost like clockwork for over a decade, with the exception of the infamous E. the last decade; despite COVID-19, annual growth has accelerated to nearly 16% over the past three years.

Massive Growth Track

Restaurant companies always want to increase same-store sales, and Chipotle is doing it; same-store sales grew 9% year-over-year in the first quarter of 2022. However, growing restaurant counts are a low hanging fruit that can deliver years of revenue growth for investors.

Chipotle has just over 3,000 stores across the company. There is so much room for growth in domestic and overseas markets. Starbucks has over 32,000 stores and McDonald’s has over 38,000. That’s not to say Chipotle has to have that many, but with food that has potentially multicultural appeal (who doesn’t like beans and rice ), is it overkill to see a company with 15,000, 20,000 or more stores down the road? I don’t think so, although it’s probably at least several years from now.

The company opens between 40 and 80 restaurants each quarter on average, so if you think of Chipotle as a long-term investment, there’s easily room for a decade or more of regular openings that can drive sales growth. The more stores, the more revenue, the more cash flow and the more stock buybacks to help increase earnings per share (EPS). Like I said, it’s a success system.

Pay for quality

The stock is currently down nearly 30% from its peak, but it remains a huge long-term gainer. A $10,000 investment when the company went public in 2006 would be worth over $315,000 today!

CMG Total Return Price Chart

CMG total return price data by YCharts.

Quality stocks don’t often trade at discounted valuations, which seems to be the case here. Analysts have full 2022 EPS forecast at $32, which puts Chipotle at a price-earnings ratio of 43.

That’s certainly not cheap for a company whose sales and EPS are growing 12-13% every year. Warren Buffett once joked that big companies bought at fair prices are better than bad stocks at low prices.

I hope I’ve made the case that Chipotle is a quality stock, but is the price right? It’s up to the investor; a long-term perspective and a dollar-cost averaging strategy can help ensure that investors get a fair measure of owning quality stocks like Chipotle. Sometimes, if you wait for the “perfect” price, it never arrives! If the stock price continues to fall, investors may become a bit more aggressive.

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