Chipotle Mexican Grill, Inc. (CMG), Yum! Brands, Inc. (YUM): This Mexican Food Giant Is Still a Buy

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Chipotle Mexican Grill, Inc. (NYSE:CMG) is celebrating 20 years of its existence in 2013. Backed with an operating experience of two decades, it has redefined the concept of fast-food restaurants. This company went public in 2006 and has appreciated a massive 875% since then. It recently declared its second-quarter financial results, which were strong and bear a testament to the company’s strong brand.

Simply solid

In the recently reported quarter, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s revenue rose 18.2% from last year to $816.8 million, while net income grew 7.6% to $87.9 million. Despite an increase in commodity costs, there was an increase in net income. The rise in prices of dairy items, chicken and salsa ingredients were behind the increase in commodity costs, but Chipotle still managed to grow income and keep customer traffic flowing, as seen by an impressive 5.5% increase in same-store sales.

Chipotle Mexican Grill, Inc. (NYSE:CMG)Chipotle Mexican Grill, Inc. (NYSE:CMG) opened 44 new restaurants in the quarter, taking the total number of restaurants to 1,502. The company has done well in the past to grow its network and it is reaping the rewards now with robust same-store sale growth. It plans to open around 165 to 180 restaurants in 2013, and seems to be on track to achieve that target; it has already opened 92 restaurants in the first two quarters.

Interesting policies

Chipotle Mexican Grill, Inc. (NYSE:CMG)’s policy of using locally produced ingredients in its dishes is a solid reason behind its success, as its restaurants are able to supply fresher and more quality food, which keeps patrons coming back. Also, it plans to further increase the quantity of locally grown ingredients. A major focus on this policy will assist the company in acquiring superior quality ingredients, which will be more cost effective. This will partially offset its general and administrative expenses, which are currently around 6.2% of revenue.

The company is also focusing on eliminating
genetically modified food from its list of ingredients, and this might be another reason why consumers might be more eager to visit the restaurants; they know they will not be getting a type of food with health benefits that are still being debated. Chipotle Mexican Grill, Inc. (NYSE:CMG) is intent on removing all GMO foods from its ingredients list and this will further strengthen its position among patrons.

Steve Ells, founder and CEO of Chipotle Mexican Grill, Inc. (NYSE:CMG), stated

That means pushing ourselves to find the best quality ingredients – ingredients that have traditionally been available only in high-end restaurants and specialty food markets – and making them available in way that is accessible and affordable.

To increase customer traffic, Chipotle Mexican Grill, Inc. (NYSE:CMG) has introduced a new menu with a prime aim to attract vegans to its restaurants to boost sales. Recently introduced tofu-based items should attract calorie and nutrient-conscious customers. So with these diverse strategies that include growing store count, attracting different types of customers by introducing a new menu and a focus on fresh and healthy food, Chipotle certainly looks like a company which should continue to perform well in the future.

But we also need to take a look at what its rivals are doing, and whether Chipotle Mexican Grill, Inc. (NYSE:CMG) is a better investment over them.

Looking around

Yum! Brands, Inc. (NYSE:YUM)’ Taco Bell restaurants directly compete with Chipotle Mexican Grill, Inc. (NYSE:CMG). Taco Bell’s prices are lower when compared to Chipotle’s restaurants, but Chipotle offers better quality and more nutritious food. This premium nature of Chipotle against Yum! is also seen in their valuations. Yum! has a trailing P/E ratio of 24 while Chipotle’s is an expensive 43.

Yum! Brands, Inc. (NYSE:YUM) also has a dividend yield of 1.8%, which it can increase since its payout ratio is a decent 42%. On the other hand, Chipotle doesn’t pay a dividend. But Yum!’s drawback is that it depends a lot on China for its growth, and the stock has only appreciated 14% year-to-date as an avian flu scare spooked customers.

Yum! Brands, Inc. (NYSE:YUM)’s profit in the second quarter fell 16% and KFC same-store sales in China declined a whopping 20%. In comparison, Chipotle certainly makes a better investment and its premium valuation is justified since it is growing.

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