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Chipotle: A Key 'Buy' Candidate for 2012

March 14, 2012 | About:

Chipotle Mexican Grill (NYSE:CMG) is an American success story that ranks right up there with Sam Walton and Walmart (NYSE:WMT). From its humble beginnings in 1993, when the first restaurant opened on an $85,000 loan and a requirement to sell 107 burritos per day to be profitable, to a month later when the store was selling over 1,000 burritos a day Chipotle Mexican Grill has been just that kind of growth story.

From that first restaurant in Denver. Colo, Chipotle Mexican Grill had expanded to 16 stores by 1998 when McDonald's Corporation (NYSE:MCD) became a major investor. The company had expanded to over 500 establishments by 2006 when McDonald's fully divested itself from the corporation. Just five years later, in 2011, Chipotle Mexican Grill has expanded to over 1,200 restaurants in 41 states, Washington D.C., Toronto and Ontario Canada as well as London, England. The company employees over 31,000 people and in 2011 had a net income of over $215 million. Kind of curls your toes when you think about it! (Or is it just me?)

In January 2006, the company's initial public offering saw the stock double on the very first day. Their where no corporate headquarters with marble halls to be built with this capital either, friends and neighbors, the company plowed the money right back into its expansion, avoiding debt every step of the way. This policy of low debt is a business model Chipotle Mexican Grill has carried out to this day — with a current debt to equity ratio of 0. This is not to say McDonald's Corporation walked away empty handed — for its initial investment of $360 million into Chipotle Mexican Grill, McDonald's walked away with $1.5 billion. McDonald's also had a lot to do with the structure and organization of the corporation, in my opinion, and furthered assistance in Chipotle Mexican Grill's international ambitions should not be ruled out.

The main theme behind Chipotle Mexican Grill's notoriety and brand image is an emphasis on quality ingredients or the "Whole Foods effect” and this is a significant difference between the company and its peers, of which Chipotle Mexican Grill continues to outperform. This performance has come at a time when, due to lower discretionary income, you would imagine consumers would be shifting to cheaper restaurants.

I think the company's focus on all naturally raised meats and fresh ingredients are the determining factor in this brand loyalty, enhanced by the trend in society towards a more healthy lifestyle in general. The Organic Trade Association has stated recently that organic food sales are growing at a rate of 20% annually in the United States. Furthermore, I think this quality ingredient branding when marketed in Europe in the near future will give the company a competitive advantage on that side of the pond — especially with all the hype over there about Franken-fruit and genetically altered foodstuffs. The company's competition, such as Burger King (BKC), have taken notice of this strategy and have begun emulating the approach in its marketing and menu items.

The economic downturn has struck Chipotle Mexican Grill in other ways though. The company has historically focused on new real estate developments in the location of its new establishments but with the stall in construction of these new developments the company has had to change its business model. This may be a blessing in disguise in my opinion. Chipotle Mexican Grill will now be opening 25% of its new restaurants in what it has termed the “A Model” restaurants. These locations will be in well established markets with high levels of brand awareness. The "A Model" locations will be in secondary trade areas that have attractive demographics but are typified by lower occupancy costs. The result is substantially lower investment costs and operating expenses than its traditional restaurants. Each "A Model" store will cost the company about $800,000 to build and is expected to deliver at least $1.6 million in revenue annually. I would think that would be a nice return in anybody's book.

There are also three facets of demographics that are currently working in Chipotle Mexican Grill's favor. The first and foremost is a significant portion of the company's customers are of Hispanic decent and presently the United States Census Bureau has tallied up 25% of the country's population to be of Hispanic decent. (The actual figure is probably much larger, in my opinion, and does not include illegal aliens). It is also estimated that by 2050 the purchasing power of Hispanics will surpass $600 billion.

The second is the baby boomers. Currently there are over 77 million baby boomers who are getting wealthier as they approach retirement and if there is one thing a retired person loves to do it is eat out. (Bingo not withstanding) Catering to these retirees and providing them with healthy alternatives that still taste good is a task Chipotle Mexican Grill seems well on its way to providing.

The third is dual income households. Although it generally takes two incomes to support a family these days this does not leave much time in the day for parents to prepare meals and one convenient alternative is eating out. It is estimated that over 50% of families in the United States are dual earner households and their combined disposable income should continue to grow as the gender pay gap equalizes, in my opinion.

It believe that Chipotle Mexican Grill has not yet scratched the surface of its growth potential and the rate of the company's growth as well as its cost saving measures, both intentional and unintentional, make the stock a strong buy. In support of this assertion the company has stated that in the U.S. alone it could still open another 3,000 restaurants before coming close to its saturation point. As for its international footprint it has only gotten started.

About the author:

Vatalyst articles are written by a team of independent traders from around the world. All of our articles provide actionable investing ideas you can use to make money.

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