Is Now the Time to Bet on Chipotle Stock?
Although I am notoriously bearish on the food and beverage industry, Chipotle Mexican Grill, Inc. (NYSE:CMG) may be the exception that disproves the rule. Casual diners are making a huge comeback in American life and Chipotle stock is riding high on that wave.
One of the most compelling arguments for Chipotle’s continued growth is the decline of the neighborhood bar. Over the last decade, roughly three neighborhood pubs would close up shop every day; in 2014, that number spiked to an average of six. (Source: “Why your favorite neighborhood bar is closing,” MarketWatch, October 13, 2015.)
However, the void left by local bars won’t be filled by upscale lounges or high-end restaurants. The financial crisis cast a long shadow over American life, making it difficult for businesses to bring in high volumes with high prices. Thus, a different type of diner was required, and that’s where Chipotle comes in.
The emergence of fast-casual diners is geared towards Americans who want to stretch their dollars. Customers can find a happy medium between a full-blown restaurant and a fast-food joint with Chipotle. But better yet, they can have a drink, too.
Could Chipotle Stock Be the Next McDonald’s?
The convergence of fewer bars and more fast-casual restaurants leads to only one conclusion: alcohol will save Chipotle.
Having the option to order a cold beer with your burrito is a winning strategy. It cements customer loyalty to Chipotle and that’s what counts. The ability to get a fresh, organic meal at near fast food prices seems irresistible. For most people, it’s a no-brainer.
The only mental block comes from the social inclination towards a friendly drink with dinner or an after-work drink. It’s a social norm that’s becoming harder to indulge because bars are disappearing, but that bodes well for Chipotle stock.
In the most recent quarter, the company’s earnings per share rose from $3.08 the year before to $4.43 this year, reflecting a 44% increase. Revenue itself jumped only 13% to $1.19 billion, meaning the net profit growth is coming from thicker margins.
Part of that story may be the alcohol sales, but another is the improvement of productivity. Chipotle is opening more than 200 stores next year. Through this, the company is continuing to expand and entrench itself across the United States, keeping an eye on the future.
Too many firms overlook minor inefficiencies that crop up during the expansion phase, justifying their laziness in the name of growth. Often the inefficiencies linger in the company’s structure, sapping its earnings and magnifying any downturn.
CMG stock will likely buck this trend, considering the company’s latest hire. To fill the newly created role of chief information officer, Chipotle brought in the long-time senior executive of Starbucks Corporation Curt Garner.
Garner has spent the last 18 years at Starbucks, including three years as CIO. He is renowned for using information technology to streamline a business, something that will help Chipotle stockholders get the biggest bang for their buck. (Source: “Chipotle Creates CIO Position, Hires Curt Garner from Starbucks,” Wall Street Journal, October 12, 2015.)
Here’s the Bottom Line on Chipotle Stock
There’s plenty of other good news for Chipotle stockholders. Rumors abound that the company will execute a stock split. Ordinarily, I couldn’t care less about a stock split, seeing as it creates no value, but CMG stock is trading near $720.00. Trading volumes have trended downward over the last five years, implying that the price is awkwardly large for some retail investors. A split would make it manageable to buy however many units you need.