Not only are restaurant stocks a sector in which you can do well as a speculator/trader, but they’re also a sector that provides a great barometer on consumer spending. Always follow both the established names in this sector and all new initial public offerings (IPOs). New concepts often have trouble catching on, but when the right concept comes along, it can pay big time.
Chipotle Mexican Grill, Inc. (CMG) reported excellent financial growth in its latest earnings results. The company said its second-quarter revenues grew 18% to $816.8 million on a comparable restaurant sales increase of 5.5%. That’s very material for such an established chain.
Net earnings increased 7.6% to $87.9 million, while earnings per share grew 10.2% to $2.82.
The company opened 44 new restaurants during the second quarter for a total count of 1,502. Management expects to open between 165 and 180 new locations this year with low- to mid-single-digit growth in total comparable restaurant sales.
Chipotle’s revenue growth was significant and represents more than operational tweaking. Consumers are spending more on dinner out. Other restaurant stocks support this view.
On the stock market, Chipotle moved significantly higher from 2010 to the first quarter of 2012. Then the company experienced a major retrenchment from $440.00 a share to $240.00, followed by a substantial rise in its share price to its current level around $400.00 a share.
The company’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
With the stock market at its high, new IPOs are everywhere and many new restaurant stocks have recently been listed.
But as is usually the case, stock market valuations are extreme and representative of a speculative fervor that is overly optimistic at best. Countless new names in restaurant stocks are trading at astronomical valuations considering their sales and often lack of earnings. (See “Why This Popular Restaurant Could Be a Wise Investment.”)
That’s the way it works with IPOs. Nobody is ever really sure whether they’ve been had or if it’s the beginning of a profitable new business relationship. Wall Street doesn’t care either way; the Street cares only about its cut.
Looking at the numbers, Chipotle looks richly valued on the stock market. But earnings estimates are going up across the board—for 2013 and next year. With this earnings momentum, the company’s lofty valuation will probably remain intact.
Notably, in the company’s latest earnings report, Chipotle cited rising food costs in all areas with the exception of avocado prices.
Operating margins actually decreased slightly because of the higher food costs and there was more expenditure on marketing. But there was still a solid gain in bottom-line earnings and shareholders’ equity rose markedly.
All in all, Chipotle reported solid second-quarter earnings results. With a more reasonable valuation, this proven restaurant operator would make for a great pick.