Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Don’t Miss Out on this Fast Food Pick

Chipotle Mexican Grill (NYSE: CMG) is the new Starbucks, or so it seems in New York City. Every corner you turn, there is a CMG restaurant and a line around the corner around lunch time. People have taken to this “fast casual” Mexican food chain, which now has over 1,200 units in more than 35 states. And while the authenticity of the food is debatable, the stellar stock performance is undeniable—up ~23% YTD. The company beat Q1 estimates and despite the significant stock price appreciation, we still view CMG as a top pick in the high growth casual restaurant space.

Chipotle Mexican Grill, Inc. (NYSE:CMG)

CMG reported Q1 EPS of $1.97, beating Street estimates of $1.93, as well as the best same store sales (SSS) numbers since 2006 of 12.7%. Of that 12.7%, 4.5% came from menu pricing (1% system-wide increase). Any menu price increases this year—we expect somewhere in the neighborhood of 2%— would help offset increases in food costs. From a cost perspective, we are concerned about rising commodity costs, but as mentioned above, we believe the menu price increases should ease investors’ worries. Management still expects mid-single-digit food cost inflation in 2012, which is unchanged from its two prior forecasts. Management has indicated that if food cost inflation reaches mid-single-digits this year, it would employ additional menu price increases.

Management maintained FY 2012 guidance, projecting “mid-single digits” for SSS growth. We, however, view this as a pretty conservative estimate given implied figures of 10% after taking out weather and leap year effects for Q1. We think ~10% y-o-y growth is attainable for the fiscal year, especially after the company noted that it had expending considerable effort to increase the number of customers served i.e., throughput. One of management’s priority initiatives is SSS improvement during peak lunch hour (12:00pm to 1:00pm), which exceeded the system-wide SSS improvement in Q1. Some estimates show that if each CMG unit added 10 customers per day, SSS on an annualized basis would increase by 1.9% and annualized EPS by $0.44, ceteris paribus.

Looking at growth prospects, management commented on improved real estate availability, which we view positively as a tailwind for domestic unit expansion. Construction of large-scale shopping centers has been lackluster but according to the company, standalone sites on the periphery of malls known as “off-mall pads” are seeing increases in supply. This translates to new construction revised upward to 36% of new restaurants in 2012, a six percent increase from 30% in 2010. This increase in off-mall pads will also benefit Panera Bread (NASDAQ: PNRA), which similarly targets off-mall pad sites for its new restaurants. CMG also outlined international expansion plans including three new units in London, one in Paris, and a couple in Toronto for the year. 2013 plans were not disclosed, but we think that CMG can accelerate Canadian expansion since consumers there are more familiar with the product and brand due to proximity to the US.

We believe CMG can realistically hit double-digit sales and EPS growth as well as expand new unit openings internationally above what management has guided. The company’s top-line growth story is unparalleled amongst its peers, bolstered by internal initiatives to increase menu prices and peak-hour throughput. Given our outlook for continued rapid growth and overseas expansion exceeding that of its peer group, we feel that a multiple above peers is warranted. Even among its high growth comps, CMG has set itself apart by generating great traffic stats and margin improvements. If EPS growth stays in the 40% range, we think it will support the premium that CMG currently commands. CMG trades at ~50.4x 2012 P/E, BJ’s Restaurants (NASDAQ: BJRI) trades at ~35.4x, PNRA trades at ~27.3x, Peet’s Coffee & Tea (NASDAQ: PEET) trades at ~40.7x, and Starbucks (NASDAQ: SBUX) trades at ~29.8x. We include PEET and SBUX in our comp set due to their high unit expansion growth. Billionaire Jim Simons’ Renaissance Technologies had nearly $300 million invested in CMG at the end of December (see Jim Simons’ top holdings). Mark Broach and Philippe Laffont are also among the hedge fund managers who are bullish about Chipotle.

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!