Tags: Chipotle | Mexican | Grill | Restaurant

David N. Frazier: Chipotle Mexican Grill: Make Money by Investing in What You Eat

By    |   Wednesday, 19 February 2014 12:17 PM

After investing and speculating in the financial markets for more than 25 years, I still find that one of the more reliable ways to select profitable stocks is to choose stocks of companies whose products or services one enjoys and uses on a regular basis.

A case in point is Chipotle Mexican Grill (CMG), which I first learned about during mid-2006 when a friend of mine recommended for us to have lunch at one of the Denver company’s restaurants.

On that first of many subsequent visits to Chipotle, I was impressed immediately with the restaurant’s cleanliness, friendly staff and large portions of healthy, well-prepared food. Not only was the pork burrito that I had very tasty, it was offered at a very reasonable price.

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Being someone who’s always on the look-out for money-making investments, when I finished that first meal at Chipotle I asked the restaurant’s manager if the company was a publicly-traded company. When he responded in the affirmative, I knew that I must review Chipotle’s annual reports and financial statements as soon as possible to determine if the company’s overall business operations were managed as well as the restaurant that I had visited.

And, the answer appeared to be an overwhelming yes, as Chipotle had grown its revenues by at least 33 percent for each of the years from 2002 to 2005 and had grown its net income to $37.7 million for the year ended Dec. 31, 2005, from a loss of $24 million during 2001.

While many restaurants struggled to stay in business during the 2007-2009 economic recession, Chipotle continued to grow its revenues and earnings at a fast pace, with the company’s net income rising by 10.8 percent during 2008 and by a whopping 62.2 percent during 2009.

Since then, the company has continued to grow its revenues and earnings at a fast pace, with its revenues rising in excess of 20 percent during each of the years from 2010 to 2012.

Although Chipotle’s annual revenue growth slowed to 17.7 percent for the year ended Dec. 31, 2013, the company’s revenues and earnings accelerated during the fourth quarter of 2013.

Specifically, Chipotle’s net income rose by 26.2 percent during the three months ended Dec. 31, 2013, as compared to the same period during 2012, on a 20.7 percent increase in the company’s revenues. Looking forward, that’s a very positive development, considering that Chipotle’s revenue and profit growth has, historically, tended to slow a bit during the fourth quarter of every year.

In addition to growing its revenues and earnings at fast rates, Chipotle has generated a high level of profits for each unit of sales. For example, during each of the past two years, the company generated a 10.2 percent net profit margin. That compares to an average profit margin of only 4.3 percent for other fast-food restaurants.

Meanwhile, Chipotle is very strong financially, with the company’s cash and holdings of U.S. Treasury securities and bank CDs covering all of the company’s financial obligations by a margin of 1.2-to-1 as of Dec. 31, 2014. As a result of that strong financial condition, and the fact that the company has no long-term debt, Chipotle is in a position to continue to open new restaurants and/or to buy back large amounts of its outstanding stock.

In regard to the opening of new restaurants, Chipotle opened 185 new restaurants during 2013, and the company said on January 30 that it plans to open an additional 180-195 restaurants during 2014.

Separately, the company purchased $110 million of its common stock during 2013, and it plans to purchase another $90 million worth of its stock during 2014.

For those of you who aren’t familiar with Chipotle Mexican Grill, the company operates fresh Mexican food restaurants serving burritos, tacos, burrito bowls (a burrito without the tortilla) and salads.

The company operates under the philosophy that diners who are in need of food being served fast don’t need to accept a traditional “fast-food” experience. Adhering to that philosophy, the company combines classical cooking methods with high-quality, fresh ingredients.

Chipotle was founded during 1993 and now operates 1,572 restaurants in the United States, seven restaurants in Canada, six in England, two in France, and one in Germany.

During 2011, the company applied its principles of combining classical cooking methods with high-quality ingredients to open a new line of Asian food restaurants under the name of ShopHouse Southeast Asian Kitchen. Like the company’s Mexican Grill restaurants, its ShopHouse restaurants focus on main dishes, which consist of rice or noodle bowls, with toppings that include beef, chicken or meatballs made with pork, chicken or tofu.

After opening six ShopHouse restaurants over the past three years, the company plans to open additional Asian fast-food restaurants while continuing to focus on its Mexican Grills.

Although Chipotle’s stock appears to be a bit expensive at this time, with it closing on Feb. 18 at a price/earnings to growth ratio of approximately 1.5, my research indicates that the company will continue to grow both its revenues and earnings at very fast rates over the next several years.

Because of the factors discussed above, I encourage stock market speculators to allocate a portion of their financial market assets to Chipotle stock at prices up to $565. Wednesday, the stock fell 68 cents to end at $552.18 in NYSE trading.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.

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After investing and speculating in the financial markets for more than 25 years, I still find that one of the more reliable ways to select profitable stocks is to choose stocks of companies whose products or services one enjoys and uses on a regular basis.
Chipotle,Mexican,Grill,Restaurant
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2014-17-19
Wednesday, 19 February 2014 12:17 PM
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