Over the last few years, Chipotle Mexican Grill, Inc. (NYSE:CMG) has been a dream stock and has helped investors accumulate fortunes. This has been made possible by its aggressive expansions in the U.S., which somewhat revolutionized the Mexican cuisine in the country.
As a result, its shares have risen nearly 220% over the last five years, while shares of Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) have risen around 65% and 72%, respectively. But even after its recent rally, Chipotle looks attractive with its growth prospects still intact.
Improving fundamentals
Chipotle Mexican Grill, Inc. (NYSE:CMG) had successfully opened around 145 new stores in 2011, 183 new stores in 2012, and plans to open around 180 new stores in 2013. Currently, the Mexican food chain operates just under 1,500 stores, and the new store openings this year could take its store count to over 1,600.
For the recent quarter, the company reported diluted EPS of $2.45, an impressive jump of 24.4% compared to last year’s quarter. Although inflationary pressures knocked off 110 bps from its restaurant margins, Chipotle was able to report 160 bps lower SG&A expenses. Its comparable sales improved 1%, but its overall sales spiked 13.4% on the back of new store openings.
The chart attached above displays the relative growth in operating cash flows, while the chart attached below displays the improvements in gross margin.
Chipotle Mexican Grill, Inc. (NYSE:CMG) has been reporting tremendous growth in its cash flows and has been improving its profitability along with store additions. That is indeed commendable, since its larger peers have been unable to beat the inflationary pressures and have had flat margins over the same period.
Industry outlook
Additionally, Chipotle’s stellar financial performance has been due to the relatively stable market conditions in the U.S. Sure, its annual GDP is expected to improve just 1%, but at least, it’s not on the verge of crisis like its European counterparts. Furthermore, the personal disposable income in the U.S. has been increasing, while unemployment has been consistently sliding, which has also been contributing to Chipotle Mexican Grill, Inc. (NYSE:CMG)’s success.
However, its larger peers have been been beaten down due to their concentration in certain international markets. Yum! Brands, Inc. (NYSE:YUM) currently generates around 44% of its revenue, and around half of its profit from its KFC China. But in March, its same store sales in the country plunged 20% due to the outbreak of avian flu.
To add to its woes, the negative publicity regarding animal cruelty and overdose of antibiotics in chicken have been detrimental to its brand loyalty, and there is little that the company can do. As a result, its shares have slid nearly 10% over the last year.
Even McDonald’s Corporation (NYSE:MCD) was also under pressure due to the worsening market in China, which led to a 13% drop in its same store sales in the country. But, management presented an optimistic outlook by announcing plans to open around 1,300 new stores this year. Since McDonald’s generates just 3% of its profits from China, the Street wasn’t too worried after hearing about its expansion plans.
Investors’ delight
Chipotle’s operating cash flows in FY12 stood at $493 million, while its TTM operating cash flows totaled $515.84 million. To bolster its EPS growth, the company has been returning value in the form of share repurchases, and in FY12 it spent nearly 43% of its operating cash flow for share repurchases.
I believe that Chipotle would continue to earmark at least 40% of its cash flow for share repurchases. This is because its stores generate an impressive ROI of 70%, and with each store opening, Chipotle’s intrinsic value increases. If Chipotle decides to use all of its cash flow to dramatically increase its store openings, the company would have to use more cash for share repurchases later. But, the logical move would be to sacrifice a 30% plus growth rate and settle for 15%-20% growth, and continue to repurchase its shares while the stock is undervalued.
Final words
Regardless of the inflationary pressures and relatively lower comparable same store sales growth, I’m bullish on Chipotle Mexican Grill, Inc. (NYSE:CMG). The company still has a lot of room for inorganic expansions, which should be enough to power up its stock for at least a couple of years. Moreover, its aggressive share repurchases highlight the faith and confidence of the board in its future, which could be followed by dividend payouts. With that in mind, I think Chipotle would be a great stock to buy.
The article This Restaurant Stock Will Continue to Soar originally appeared on Fool.com.
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