The company is also ramping up advertising throughout 2013 after relatively low spending in a lackluster 2012; its 2013 advertising spending is running at about 5.5% of sales compared to less than 4% of sales in 2012. If these initiatives can successfully stem the company’s long-term margin decline, then shareholders could be in for significant upside.
Even if CEC’s earnings decline does not reverse, the stock is still a better bargain than many companies that have growing earnings. Chipotle Mexican Grill, Inc. (NYSE:CMG) is a tempting buy because it is one of the most promising concepts in the fast-casual space. Unlike CEC, Chipotle Mexican Grill, Inc. (NYSE:CMG)’s niche is growing, which provides a forgiving operating environment should the company make a minor mistake. The company is also riding the wave of the natural ingredients and health food craze.
Even companies that have the best prospects can be too expensive. Purchasing Chipotle Mexican Grill, Inc. (NYSE:CMG) at 44 times a strong trailing earnings figure is speculative at best and offers a low return if the company does not live up to expectations. If the company does not grow earnings, long-term investors will receive a 2.2% annual return from the stock (one divided by 44). Of course, earnings will grow, but investors are exchanging their money for very little value today in the hope of much more value in the future.
CEC, on the other hand, changes hands at a price that assumes earnings per share will remain in decline, even though it is more likely to increase. In addition to recent initiatives by management to stabilize margins, the company has $20.2 million in cash on its balance sheet — as much cash as it has ever had in its history of significant share repurchase. As a result, the company’s future earnings per share is more likely to increase rather than decrease.
McDonald’s Corporation (NYSE:MCD) and Chipotle Mexican Grill, Inc. (NYSE:CMG) are in much better operating positions than CEC, but they may not be better investments. McDonald’s Corporation (NYSE:MCD) is scrambling to shore up same-store sales and Chipotle Mexican Grill, Inc. (NYSE:CMG) has a lot of growing to do before investors receive enough value to justify today’s price. Meanwhile, CEC has unexciting future prospects, but continues to increase value per share outperforming the S&P 500.
It is usually a better idea to buy today’s earnings than to hope for earnings in the future. Investors who share this sentiment should take a closer look at CEC Entertainment.
The article This Stock Is a Better Investment Than Chipotle and McDonald’s originally appeared on Fool.com is written by Ted Cooper.
Ted Cooper 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.
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