Chipotle Mexican Grill Is a Long-Term Buy

Chipotle Mexican Grill (CMG) has been on a strong run in the past three months as its shares have appreciated to the tune of almost 20%. The company’s strong run is being driven by its improving financial performance.

Making strong progress

For example, Chipotle’s revenue for the second quarter increased to $1.2 billion from $1 billion in the same quarter last year, driven by an increase in comparable sales growth and new restaurants opened in the quarter. The quarter also included an increase in total operating expenses to $970.4 million from $870.2 million last year, driven by an increase in food, beverage and packaging expenses.

However, Chipotle’s revenue growth outpaced the growth in its expenses.

Further, the company’s general and administrative expenses decreased to $70.2 million from $74.9 million in the same quarter last year. This helped the company improve its operating income, which increased to $227.4 million from last year’s income of $179.8 million. Also, net income for the quarter increased 27% to $140.2 million from $110.2 million in the prior-year period.

Additionally, Chipotle’s comparable store sales growth increased 4.3% compared to last year’s second quarter. Despite achieving such impressive growth, Chipotle is still a value pick as it has a trailing P/E ratio of 44.68 and a forward P/E ratio was 35.31. This means that the improvement in Chipotle’s earnings performance is expected to continue in the future.

At the same time, Chipotle has a strong cash and cash equivalent position that increased to $470 million in the first half of the year from $323.2 million in the same period last year. This was a result of an increase in cash generated by operating activities that increased 11.2% from last year’s same period.

Moves to drive growth

Armed with a strong fundamental and cash position, Chipotle is making moves to improve its financial performance going forward. In order to sustain its competitive edge, Chipotle has taken various measures. For instance, Chipotle’s has expanded its delivery partnership with Tapingo, which will allow it to deliver to 40 college campuses by this year and more than 100 colleges by the end of 2016.

Additionally, the company also added 48 new restaurants in the quarter, bringing its total count to 1,878. Additionally, the company is promoting healthy food by excluding GMO items. According to a press release from Chipotle:

“The strength of our business is the product of our unique food culture and unique people culture, and we constantly find ways to improve, and overcome challenges we encounter-whether that means non-GMO ingredients, adding new pork suppliers to ensure food with integrity, or reinventing the way tortillas are made at scale”.

Conclusion

Chipotle put in a solid operating and financial performance last quarter, and it is likely that this trend will continue in the future as the company continues to expand its reach and address a bigger market going forward. For instance, in 2015, the company expects to open 190 to 205 new restaurants and increase comparable restaurants sales in mid-single digits. Additionally, it has a favorable valuation that indicates further growth in the financial performance. Hence, considering all these points, I think that Chipotle is a stock to buy for the long run.
Published on Sep 23, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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