Hit your Portfolio with some Flavor: Analyzing Chipotle

Ticker: CMG
Sector: Consumer Discretionary
Industry: Restaurants
Headquartered: California, USA
Moat: Wide – Intangible Assets – Brand, Scale

Action at date of this post

Accumulate as of 05.25.2024
This is technically a buy opinion. Accumulate means if you are an investor that buys periodically then keep buying. If you do not own it, but are looking to buy, this is an indication to open a position of no more than 25% of your intended, total position then accumulate shares over a set time frame.

Fair Value Analysis

I do a fair value analysis on every stock in two ways. The first is the Discounted Cash Flow (DCF) method which I use for most stocks. I also run the Peter Lynch Fair Value method on stocks as well. I like running both as there are times where one way is more meaningful than the other depending on the stock.

Chipotle Corporate Overview

Chipotle Mexican Grill, Inc. is a fast-casual restaurant chain that originated in 1993. It specializes in Mexican-inspired dishes, primarily burritos, tacos, and bowls, with an emphasis on fresh, high-quality ingredients. Chipotle’s “Food with Integrity” commitment highlights its dedication to using organic produce and responsibly sourced meats.

The company has grown significantly, with thousands of locations primarily in the United States but also internationally. Chipotle has embraced digital innovation, enhancing its online ordering system and delivery services, which has fueled growth, particularly during and after the COVID-19 pandemic. The introduction of “Chipotlanes” (drive-thru lanes for digital orders) and a robust loyalty program has further bolstered customer engagement and sales.

Despite facing challenges such as food safety concerns and rising operational costs, Chipotle remains a leader in the fast-casual dining sector, known for its strong brand and consistent focus on sustainability and quality.

Chipotle Segment Analysis

Like most restaurants, Chipotle operates in one segment restaurant sales. Kind of hard to make that more interesting. Read on.

Chipotle Moat Source

Chipotle enjoys strong brand recognition and strong operational ties food providers giving it competitive advantages that other restaurants find hard to achieve.

Chipotle Growth Outlook

Chipotle sits comfortably at the intersection of fast food and casual dining. As such, it has built a strong brand and loyal customer base. The company was an early and aggressive adopter of technology through its app and loyalty program that now boasts 40 million members in the 5 years since the program was started.

The average store now does $1.1 million in digital sales (30-40% of overall sales per store) which far outpaces the total sales of many fast food competitors. Such a successful loyalty program helps the company with menu development, marketing, order frequency, and customer data tracking. All of the above feed into the companies growing competitive advantages.

The growth of its digital sales also revealed a growth opportunity in Chipoltlanes which are online order only stores with drive thru pick up. This format has helped with other digital only store formats for college campuses and dense office areas. Chipoltlanes are in 25% of existing stores and 80% of new unit openings.

The food safety scares from almost a decade ago helped enhance the companies logistics and operational efficiencies. Today, the learning from those challenges has helped the company carve out enviable profit margins and a leaner operation.

The Numbers

Strong revenue growth paired with manageable growth rates have allowed the company to turn out solid earnings growth. ROIC and ROCE levels are strong, consistent and growing – all things I want to see. To keep the flywheel turning the company has healthy CAPEX spending to keep the burrito folding magic coming.

This website and associated newsletter along with its content/links are not financial advice. Nothing in this newsletter is an investment recommendation. All content is created for entertainment, educational, or informational purposes only. My strong buy, accumulate, hold, reduce or sell opinions are exactly that – opinions. Be sure to do your own research for your own particular circumstances or higher a professional advisor.

At the time of writing this post, the author does have a position in CMG.