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Why You Should Buy Chipotle Mexican Grill Over Yum! Brands

May 01, 2014 | About:
jaggom

jaggom

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The food industry has changed a lot over the years. Food and beverage companies are focusing on innovations in their menus as well as aggressive marketing strategies to expand their coverage. This has resulted in more customer engagement at the food joints. Chipotle Mexican Grill (CMG) and Yum! Brands (YUM) are some of the top companies who have performed well in the past, extending their boundaries across the nation.

How Is Chipotle Performing?

One of the fastest-growing restaurant chains in the U.S. is Chipotle Mexican Grill. The company is seeing good growth that can be seen through fantastic results in each quarter. Chipotle has reported handsome sales amounting to $3 billion and has extended its operation to around 1,500 restaurant chains across the globe as well as in the U.S. Chipotle has always succeeded in delivering quality fast food services, providing customer satisfaction as well as justifying its motto — food with integrity.

Chipotle’s strength has been its fresh ingredients. It provides delicious fast food with fresh ingredients that are free from antibiotics. The company is expecting a bright future and the past five years also reveal that the stock has grown by 600%. But Chipotle has certain areas to be worried about. Though the stock has been impressive on the stock market, the company is seeing stagnant profit margins. Chipotle's profit margins are declining year over year. In the midst of such conditions, the stock is becoming quite expensive day by day.

The reason for the flat profit margin of Chipotle is the appreciation in the prices of beef, which is resulting in a decline in beef sales. Besides beef, the company is seeing price hikes in ingredients such as salsa, dairy products and poultry products. With the prices rising, the company is under pressure to maintain profit margins. Given the competition from peers such as Yum! Brands' Taco Bell, Chipotle should take concrete steps to get over this tough situation and gain a competitive edge over its peers.

Trying to Improve

Chipotle is working on various aspects to improve its profitability. It has recently made a strategic move to leverage its profit margins by dropping pork from the menu. On the other hand, despite dropping pork from the menu, it isn’t dropping the price. Chipotle is also enriching its portfolio with La Combe to serve coffee brewed from organic beans.

In this competitive market, Chipotle is serving coffee as breakfast in two airports. So, it might face stiff competition from its peers such as McDonald’s, Starbucks and Dunkin’ Donuts, which are also offering the same menu.

Surveys have revealed that coffee is the most popular beverage globally with annual consumption of 400 billion cups. Further, coffee constitutes 83.3% of the hot beverages market in the U.S. Coffee consumption is predicted to increase at an annual growth rate of 2.7% till 2015. These statistics can force Chipotle to serve coffee at all its locations in the future. This can help Chipotle derive more revenue from the fast growing coffee business in the U.S.

Yum's Threat

Chipotle has a strong competitor in the market in the form of Yum! Brands. Like Chipotle, Yum! Brands' Taco Bell has also been revising its menu to get more customers. Taco Bell, in combination with Lorena Garcia, has introduced new dishes to its menu such as the Cantina Burrito bowl.

There is stiff competition among the two companies on pricing. But Taco Bell has an advantage over Chipotle as it has priced its burrito at $5, which is $1.50 cheaper than what Chipotle offers. Despite this difference in the pricing, Chipotle expects no decline in sales as it believes that its loyal customers will continue driving in more traffic.

On the other hand, moving on to Yum! Brands, the company is really focused on China as the country provides awesome opportunities for growth. China is one of the biggest overseas markets with around 3,800 KFC restaurants. But Yum! sees a decline in KFC sales as a result of bird flu issues in China. However, the declining sales of KFC were offset by an increase in sales at Pizza Hut.

Conclusion

Looking at both now, Chipotle is trailing at 46 times earnings, which makes it quite expensive. But the forward P/E of the company at 36x is convincing and substantial growth in earnings is expected. In addition to this, the company’s growth rate in future at a CAGR of 20% is quite impressive. While looking at Yum!, the earnings are expected to grow at a CAGR of 11%, which makes the P/E ratio of 30 look expensive. Also, the company might face challenges in China due to bird flu issues. Looking at this comparison, Chipotle appears to be a better pick than Yum! Brands.


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