Chipotle Mexican Grill, Inc. (CMG) Is Reaching for New Heights

Formidable competitor

Chipotle Mexican Grill, Inc. (NYSE:CMG)’s competitive strength comes from its unique healthy food concept. It is already much ahead of Qdoba, a similar Mexican chain owned by Jack in the Box Inc. (NASDAQ:JACK). Despite serving similar food and having a similar assembly-line model, Qdoba has not had the same results as Chipotle Mexican Grill, Inc. (NYSE:CMG).

Last month, Jack in the Box Inc. (NASDAQ:JACK) announced that it will close 67 under-performing Qdoba restaurants, which is about 10% of its total store count, or 20% of its total company-owned store count. Investors welcomed the restructuring, as this was a good move from Jack in the Box Inc. (NASDAQ:JACK)’s overall perspective.

The company’s valuation of 18.8 times its forward earnings is appropriate as selling of the unproductive stores will bolster its future profits and cash flows. However, the closure of the Qdoba stores is a significant conquest for Chipotle.

Taco Bell, owned by Yum! Brands, Inc. (NYSE:YUM) is a bigger challenge. Chipotle can never match Taco Bell’s prices and Taco Bell can never match Chipotle Mexican Grill, Inc. (NYSE:CMG)’s quality. It is an interesting duel going on between the two and both players are holding their ground well.

With no claims of superior quality food, Taco Bell is creating a solid position among Mexican food chains. Its Cantina Bell menu and Doritos Locos Tacos are a major hit. The chain saw same-store sales growth of 2% in the recently reported second quarter, which comes over 13% growth in the second quarter of 2012. Taco Bell contributes 60% of Yum! Brands, Inc. (NYSE:YUM)’s US operating profits.

Amid the China problems and softness in both KFC and Pizza Hut in the US, Taco Bell has been a bright spot for Yum! Brands, Inc. (NYSE:YUM). With its forward price-to-earnings ratio of 18.5 times, Yum! Brands, Inc. (NYSE:YUM) offers investors a good entry point to leverage Taco Bell’s success.

Last word

Chipotle has a number of growth boosters, like pricing power, for good comp growth and margin expansion. The company is also regularly opening new stores and stands to gain from Qdoba’s store closures. These factors justify the stock’s high valuation and promise excellent shareholder returns.

The article Chipotle Is Reaching for New Heights originally appeared on Fool.com and is written by Gaurav Basu.

Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Inc. (NYSE:CMG). The Motley Fool owns shares of Chipotle Mexican Grill. Gaurav is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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