One concern is that Chipotle is trading at 42 times earnings. This makes it a riskier play than McDonald’s Corporation (NYSE:MCD), trading 17 times earnings, and Yum! Brands, Inc. (NYSE:YUM), trading at 24 times earnings.
High multiples don’t matter much when the broader market is stampeding higher, but the market will eventually pull back, and when it does, Chipotle isn’t as safe as McDonald’s Corporation (NYSE:MCD) or Yum! Brands, Inc. (NYSE:YUM). The chart below provides an example. Pay attention to how these stocks performed when the market crashed in 2008.
McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) were clearly safer places to be.
Yum! Brands, Inc. (NYSE:YUM) has 39,000 restaurants in 125 countries, with broad exposure in China and India. With more middle-income consumers in these countries, growth should be stable. On the other hand, the domestic market might not perform as well, as Americans are becoming more health conscious by the day. Yum! Brands should find a way to continue to grow, since it always has in the past. However, if Chipotle manages to steal significant market share from Taco Bell, then it might aim to attack Yum! Brands in other markets as well.
McDonald’s Corporation (NYSE:MCD) might not be growing at the rate of Chipotle, but it’s still the strongest brand of the three by a landslide. The company is facing increased competition, but its menu innovation (including healthy options) and marketing power should lead to a defensible market position. McDonald’s is also trading at 17 times earnings, representing fair value. McDonald’s isn’t a serious threat to Chipotle, and vice versa. The big difference between the two companies for investors is whether or not you want to roll the dice (Chipotle) or play it safe (McDonald’s).
Chipotle is a top-notch operation. There is no doubt about this whatsoever. And that being the case, the company should reward its shareholders over the long haul. But with the broader market looking frothy and the stock trading at 42 times earnings, this simply doesn’t look to be an ideal entry point.
The article Is This High-Growth Restaurant Company Resilient? originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.