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Jonathan Abenaim
Long only, growth at reasonable price
Summary
Chipotles long term growth prospects are intact based on its industry
trends and overall business quality.
As a wise investor once said, "The best thing that happens to us is when a
great company gets into temporary troubleWe want to buy them when
they're on the operating table."- Warren Buffet.
From its IPO in 2006, Chipotle has seen many ups and downs, however,
investors ultimately witnessed a 1500% share price appreciation in a 9-year
period. Steve Ells' concept was able to continue its robust growth from its IPO
and through its time as a public company with revenues growing from $860
million to $4.5 billion in that 9-year period.
Chipotle's fall from grace began in 2015 with its first food crisis outbreak
causing what was later to become a 60% decline in its share price. It seemed
like every week, major news outlets were announcing bacteria such as
Salmonella and E-coli had infested yet another Chipotle store. Ultimately, this
resulted in a major loss of confidence by its clients. What was previously a jam
packed, high-quality quick service concept, became a deserted burrito chain.
(Source: Bloomberg)
Let's first take a look at Chipotle's unique business model and then at the
industry trends, signaling whether the consumer is switching to a fast casual
service or sticking to a different style of eatery.
Chipotle's rise to fame all began when a young professionally trained chef
named Steve Ells created a Mexican fast-casual concept in which customers
can eat quality food, prepared fast with local organic ingredients, at a low
price. What made Chipotle a unique eatery was that its food was prepared in
front of the customer with an open style kitchen, something never done before
in the quick service restaurant industry.
Since its inception in 1993, Chipotle has risen its store count from 1 to over
2000 stores today. An extremely important factor to be taken into account is
that all these stores are corporately owned and have no franchises. Chipotle
was able to cycle cash and continue to grow its store base without the use of
debt, showing management's excellent ability to deploy capital. ROIC has been
the highest in the industry for years. Excluding MCD and others who conduct a
franchise model, Chipotle had the most impressive economics to its business.
With a $2.5 million average revenue for mature stores and $2 million for new
stores openings, Chipotle has remarkable store revenues compared to its
peers. Moreover, it costs the burrito chain a mere ~$800,000 to open these
new stores.
(Source: Euromonitor)
As seen in the graph above, it is clear that since the beginning of the 2000's,
there has been a major shift away from the fast food space as consumers are
leaning towards a healthier fast-casual experience. I believe that based on
significant growth seen at Panera (NASDAQ:PNRA) and other publicly traded
fast-casual eateries, this trend will continue its rise.
Future Growth
One extremely important factor investors must assess is whether Chipotle has
effectively stabilized business and whether it will return to growth.
By having a look at recent SSS trends, investors can judge for themselves
whether management was effective in bringing customers back or not.
( Source: Company Fillings)
As seen in the chart above, December and January have both seen a major
uptick in traffic and same store sales for Chipotle. Moreover, according to a
private study conducted by M Science, March is looking to be an impressive
month of growth for Chipotle. In all, this signals to me that Chipotle is
effectively bringing the customer back to its burrito chain and a shift from
business stabilization to growth is underway.
Risks
Just like any investment opportunity, there are risks associated with investing
in Chipotle. One of the biggest risks I see at the moment is Chipotle's ability to
continue on its growth path. A bet on the company today is a bet on
management's ability to continue to scale its stores while growing demand for
the brand.
The last risk I see on the share price is short term thinking. Investors must
avoid focusing on quarter to quarter results and instead concentrate on the
long term picture. The greatest business builders took time to execute their
strategy and same goes for Chipotle. If economics turn bad at Chipotle then it
may become a good reason to avoid the stock, however, these economics are
intact. Chipotle's business model is not broken.
Valuation
Conclusion
Investors must remain focused on the long term rather than focusing on
quarter to quarter results. Chipotle is in the midst of transitioning from
stabilizing their business to returning to growth and investors must be patient.
In my opinion, the negative news around the stock and the recent attack by
short sellers sets the stage for a perfect investment opportunity with an
outstanding return potential.
I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business
relationship with any company whose stock is mentioned in this article.