Chipotle Mexican Grill (Ticker: CMG) - Brief Breakdown
In my Brief Breakdowns,I pick a stock and present opposite sides – I present the bullish argument and the bearish argument.
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Company Description and Qualitative Analysis
Chipotle Mexican Grill, Inc. owns and operates approximately 3,000 “fast-casual” restaurants throughout the United States, Canada, and Europe. Chipotle started the fast casual movement and is one of the premier names in the space. I put Chipotle in a separate category to the conventional fast food brands like McDonald’s and I believe most consumers do as well. There is no or limited drive-thru options for Chipotle and there has been viral internet videos and popularity surrounding Chipotle. The videos have generally been positive, but there’s also been some hilarious clips from South Park mentioning South Park (see below). These viral videos are seemingly free marketing for Chipotle and have in turn made Chipotle a household name with minimal footprint compared to other restaurant chains.
Even throwing it back to the days of Vine, kids knew girls just love Chipotle.
https://youtube.com/shorts/e56MuzEGZm4?feature=share
Quantitative Analysis
At the time of this writing (7/10/2022), CMG is trading at $1339.28 with a 52 week range of $1196.28 - $1958.55 and a market cap of $37.45B. In Q1 of 2022 Chipotle saw total revenue increase 16.0% to $2.0 billion, comparable restaurant sales increase by 9.0%, operating margin increase by 0.1% to 9.4%, and diluted earnings per share was $5.59 which was a 25.6% increase. Return of equity (ROE: Net Income / Total Equity *100) of CMG is 30.69% and net margin (net income / revenue) is 8.74%. The price to earnings (price per share / earnings per share) ratio was 55.34 and the debt to equities ratio (total liabilities / total equity) is 2.03. You can view CMG’s Q1 2022 earnings here and you can download their 2021 Annual Report here.
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Bullish Thesis
Here are three points to support the bullish thesis:
Innovation: Whether you like it or not, the overhead costs for running a restaurant business are increasing rapidly. Chipotle is trying to combat this by launching a $50 million venture fund, investing in Nuro to pilot Chippy, a robotic tortilla chip maker, and other various robotic/cost saving measures in order to keep the cost of their menu where it is. I believe the price point of $10 to $15 with a filling meal that Chipotle offers is a sweet spot that if CMG is able to maintain will give them a huge competitive advantage in the restaurant world. I like seeing Chipotle determine cost saving measures across the board in order to increase margins and not suffer on quality.
Optimizing Order Taking: Chipotle has optimized order taking so each place does not have to sacrifice taking the orders of online, Uber Eats, and other delivery service orders over the in person. This not only makes the in-store customer feel like they are the priority, it also ensures the delivery customers get their food in the fastest possible time. Chipotle is making sure every customer is a priority and realizes the value of having customers eating inside their restaurants.
Name Brand: As shown in the YouTube videos in the qualitative analysis, there is a large following that absolutely loves Chipotle. Chipotle has viral videos and is a part of the running joke that guacamole is a little extra. Although there is a small footprint, I find it hard to believe that anyone has NOT heard of Chipotle. Many people have become accustomed to Chipotle and have eating at a Chipotle a part of their daily or weekly routine. The viral marketing outside of Chipotle will continue and help the growth of Chipotle, although it is unpredictable when it will happen.
Bearish Thesis
Here are three points to support the bearish thesis:
Small Footprint: The Chipotle market cap is one of the largest market caps for any restaurant, but it has less than 10% of the retail footprint than the likes of McDonald’s. This limits the reach of Chipotle and how much it can grow. This simply means that Chipotle needs to operate at larger margins or figure out how to make more money in order to expand its retail footprint. Chipotle looks primed in order to expand, but there are a lot of up front costs and risk of where to expand in order to optimize success.
Singular Store and Concept: Chipotle Mexican Grills Inc. owns and operates only Chipotle Mexican Grill restaurants. This could be viewed as a positive or a negative. A positive because Chipotle specializes in the singular concept and a negative because it is a risk for a singular concept if it does not work. So far Chipotle has been successful, but if for some reason there was something that happened or a bad batch of chicken causes massive amounts of salmonella (although Chipotle has survived this multiple times unfortunately) can cause swings in the short term.
Staff Shortages: This is a common FUD argument for almost every restaurant business at the moment. The positive spin on this is Chipotle is trying to figure out ways to optimize business ventures and the food making process. The negative spin is it takes a lot of initial investments to optimize these things and then place them into every store. With the smaller footprint it is not as large of an investment as a change in say McDonald’s would be.
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Disclosure: The article was written by Brandon Keys, and it expresses the author's own opinions. I am not receiving compensation for it. I have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon is not a financial advisor. I encourage all readers to do further research and do your own due diligence before making any investments.