3 Problems Investors Are Ignoring: Chipotle Mexican Grill, Inc. (CMG)

What Should Investors Do?
If you want growth with some income to lessen the volatility, consider McDonald’s or YUM Brands. Whether each company grows as fast as Chipotle or Panera isn’t the point. Both companies generate about $0.17 of free cash flow per dollar of sales, versus about $0.06 of free cash flow at both Chipotle and Panera. This means both McDonald’s and YUM Brands should be able to afford significant dividend increases and share repurchases.

On the other hand, if investors want a fast growth restaurant concept, I think it’s time to consider switching from Chipotle to Panera. Chipotle’s three issues of slowing same-store sales growth, slowing new store growth, and falling margins just aren’t an issue at Panera. Panera has been the more consistent performer, and is forecasting 4.5% to 5% same-store sales growth in 2013. Chipotle is forecasting “flat to low single-digit comparable store sales.” With earnings growth rates of 19% and 20%, the company’s look is nearly interchangeable. That is, until you realize that Chipotle sells for over 31 times 2013 projected earnings versus a multiple of 23 at Panera.

Panera has more consistent performance, a broader selection, nearly the same expected earnings growth, and a P/E ratio that is over 25% cheaper. For a while Chipotle set the standard in restaurant growth stocks, but today we appear to have a new leader. Investors should add PNRA to their Watchlist to see if this new leader can keep its throne.

The article 3 Problems Investors Are Ignoring originally appeared on Fool.com and is written by Chad Henage.

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