Is Chipotle Mexican Grill (CMG) a Good Investment?

Chipotle Mexican Grill, Inc. (NYSE:CMG), the Tex-Mex fast food chain, was down as much as 14% following its 3Q earnings announcement. The company has been on a roller coaster ride over the past six months, losing close to 35% in market value over this period. The company began its initial decline after 2Q, when Chipotle started seeing issues related to slowing growth. The company had beat 2Q EPS estimates, but saw a same store sales growth miss, posting 8% growth versus estimates of 10.2%. For the latest quarter, Chipotle posted earnings of $2.27 a share, below $2.29 estimates. Revenue missed estimates of $704 million by $3 million.

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Two top competitors for Chipotle include Qdoba and lower-priced fast food chain Taco Bell. Larger fast-food chains own both companies, with Jack in the Box Inc. (NASDAQ:JACK) owning Chipotle’s closest competitor, Qdoba. Yum! Brands, Inc. (NYSE:YUM) operates the Taco Bell chain. Both of these competitors have a little more diversification compared to Chipotle when it comes to revenue streams. Jack in the Box not only operates a legitimate Chipotle competitor, but also a quick service fast food restaurant bearing its own name. The company was, however, down as much as 5% on Chipotle’s earnings miss—see whether Jack might be a good buy.

Yum operates the well-known brands KFC, Pizza Hut and Taco Bell. It appears that David Einhorn was correct on the latter, as the company is up almost 5% this week on a 3Q earnings beat. The company’s 3Q EPS was up over 20% from last year. Yum is continuing its aggressive international expansion, planning to open 750 stores in China next year. Slowing growth in China has put pressure on the company, yet same stores sales for the region are expected to continue to grow at a mid-single digit rate for 2013. Yum still has much room to grow in China, having only about one-third of the number of stores in China as it does in the U.S.

McDonald’s Corporation (NYSE:MCD), although not a direct Tex-Mex competitor, is no doubt a competitor as it attracts customers with a host of low-priced menu items. McDonald’s introduction of new recipes, including frappes and smoothies should help the fast food chain gain exposure in the coffee and smoothie industries. Ken Fisher is also excited about McDonald’s continued ability to gain market share; he took a position in the company that upped his 1Q stake by over 200,000% and made Fisher Asset Management the top fund owner by shares at the end of June.

Panera Bread Co (NASDAQ:PNRA), much like Chipotle, is a higher-priced food choice for consumers. Both companies have seen much success over the past year, being rewarded with solid stock price performance. Generally weak economic activity in this segment has caused some investors to become cautious, yet demand for Panera’s food has managed to remain high, and consumer preferences remain starved for fresh and healthy menu options.

Chipotle and Panera have the highest P/E ratios of the companies listed, at 35x and 33x respectively. On the other hand Yum, Jack in the Box and McDonald’s all trade in a tight P/E range between 18x and 21x. On a P/S basis, Chipotle is well above its peers, trading above the peer average of 2.3x with a sales multiple of 4.1x.

Chipotle is expected to grow its revenues by 21% in 2012, after it achieved a 24% growth in 2011. The company also expects to increase same-store sales by 7% in 2012. However, competition is expected to put pressure on the company by imitating Chipotle’s style and introducing high quality ingredients. Accelerated food inflation is also expected to compress Chipotle’s margins in the interim. We think the company is facing too many headwinds to recommend buying in now. At its forward P/E ratio of 21x, the company trades in line with its peers.

On the other hand, McDonald’s trades at the lower end of the industry’s P/E range, and pays a 3.3% dividend yield. We like the company’s already dominant international presence and initiatives for future growth. The company recently announced a barrage of new menu items and appears to be constantly iterating in an effort to keep customers coming back for more, which will be the driver for the company’s estimated 9% CAGR over the next 5 years.

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