Chipotle Mexican Grill (NYSE: CMG) is known for its pricey but tasty burritos and ludicrously overpriced stock. Chipotle shares were trading for $460.51 on August 3, 2018.
This begs the obvious question does Chipotle make money? Which leads to the equally important question are boutique fast food operations like Chipotle and Shake Shack (NYSE: SHAK) a good investment?
Chipotle makes a little money it reported a net income of $59.45 million; an operating income of $224.29 million, and a gross profit of $224.29 million for 1st Quarter 2018. All of that was achieved on quarterly revenues of $1.148 billion.
Yes Chipotle Makes Money
That’s impressive for a mid-sized restaurant brand but it hardly justifies the stock price. Nor do Chipotle’s assets justify the stock price, it had $530.66 million in cash and short-term investments and $2.097 billion in total assets on March 31, 2018.
The company does generate a little cash and cover its expenses. It reported an operating cash flow of $201.12 million and a free cash flow of $143.59 million on March 31, 2018.
So yes Chipotle makes money, but not enough to justify the stock price. There is no way this chain is worth nearly $450 a share. Incredibly, this over-priced company pays no dividend and it has no cutting-edge technology like Amazon (NASDAQ: AMZN).
How big is Chipotle anyway?
Chipotle has been carrying out one of the highest-profile restaurant expansions in America. The number of its Mexican Grills more than tripled in the last decade.
Back in 2007 there were 704 Chipotle locations, by 2017 the company was operating 2,408, Mexican Grills worldwide, Statista calculated. The growth has been rather constant (around 200 grills a year), Chipotle opened 158 grills in 2017, 240 in 2016, and 227 in 2015.
The slow and steady growth has been one of the more refreshing aspects of Chipotle. It also begs the question why does a company with such conservative management; and no dividend, have such a high stock price?
Why does Chipotle have Such a High Stock Price?
The most likely explanation for the high price I can think of is, people simply like Chipotle. They love its burritos and enjoy eating there.
The reputation for high quality, ethical treatment of employees, natural ingredients and liberal values seems to help too. As with Berkshire Hathaway (NYSE: BRK.B) having a very different set of values seems to boost the stock.
An obvious conclusion is having such a values-centered approaches encourages people to hold the stock. That apparently keeps the price high and stable.
Which Stock is the Next Chipotle?
It also raises an interesting question for investors are there any potential Chipotles out there? That is small but profitable eatery stocks with a cult like following.
Two stocks seem to stand out with the potential to become the next the Chipotle. The first is GrubHub Inc. (NYSE: GRUB) the popular meal delivery service’s shares were trading at $124.85 on 3 August 2018.
Grubhub has been displaying a lot of year to revenue growth lately. Revenues grew by 48.96% between 1st quarter 2017 and 1st Quarter 2018. That means Grubhub’s revenues nearly doubled in a year.
Is GrubHub the New Chipotle?
Like Chipotle. Grubhub sells tasty treats to the upwardly mobile. It also seems to be the perfect stock for a nation of foodies that increasingly dislikes driving. Not to mention a country with legions of tired soccer moms faced with the need to feed their families after a hard day at the office.
GrubHub is not making that much money; it reported a net income of $30.77 million and revenues of $232.57 million for 1st Quarter 2018. Yet it has the cult-like following and a growing reputation.
Another similarity to Chipotle is that Grubhub likes to operate below the radar, expanding with its own resources. Like Chipotle, Grubhub concentrates on word of mouth promotions, and carefully choses markets it operates in.
An obvious plus to Grubhub is that it might expand into larger and potentially more lucrative markets such as grocery delivery at some point. An obvious strategy for GrubHub would be to team up with Ocado PLC (LON: OCDO), Amazon (NASDAQ: AMZN), Kroger (NYSE: KR), or InstaCart to create a combination meal and grocery delivery service.
Grubhub might be the far better stock than Chipotle because it has serious growth potential outside of the meal business. Its network of drivers can conceivably be harnessed to deliver everything from packages to prescriptions to groceries.
Or is Shake Shack the New Chipotle?
Then there’s Shake Shack (NYSE: SHAK), the New York based quality burger outlet has some similarities to Chipotle. It cranks out a high-quality version of a working-class comfort food and targets diners.
More importantly, Shake Shack is following the Chipotle business plan of strategic limited growth in specific areas. It opens just a few locations in affluent neighborhoods, in growing cities like Denver. Shake Shack also goes out of its way to locate in places where competition is scarce like gentrifying neighborhoods and airports.
Another similarity is that Shake Shack tries to be the anti-McDonalds selling a few high quality items to people with discriminating tastes. Likewise, Chipotle positions itself as the anti-Taco Bell.
As with Chipotle, Shake Shack relies heavily on reputation and word of mouth instead of advertising or marketing. That helps in an age when people, especially those under 40 are increasingly hostile to advertising.
Is Shake Shack a Value Investment?
Shake Shack offers a low stock price (for today’s overpriced market); $57.99 on August 3, 2018. Unfortunately the Shack also offered a low gross profit $64.49 million, revenue $99.12 million, operating income and net income $3.51 million on March 28, 2018.
Despite that Shake Shack is capable of sudden spurts of income growth. It reported a loss of $-12.46 million for 4th Quarter 2017. That was followed by a net income of $3.51 million in March 2018. It looks like Shake Shack’s revenues shot up by an impressive $15.97 million in just three months.
Shake Shack is a very interesting company that is capable of sudden growth. Unfortunately, Shake Shack has not burst into the American mainstream like Chipotle has.
Both Shake Shack and GrubHub are stocks to watch and buy if you want a contrarian growth stock. Each of these brands has the potential to be the next Chipotle. If I would buy one it is GrubHub which has the business model, technological and logistical expertise, and platform for rapid growth in today’s America.
Quality comfort food and fast food is certainly a value investment for the 21st Century. It is something that people spend money on regardless of the economy. GrubHub, Shake Shack, and Chipotle are stocks to consider in an age marked by the slow decline of traditional fast food empires like McDonalds (NYSE: MCD).
This analysis first appeared at Market Mad House your home for stock market insanity and retail lunacy.