Generally speaking, the restaurant business isn't a great one to invest in. Restaurants are expensive and complicated to manage, which is why many of them fail. Indeed, even the larger restaurant chains with proven staying power seem perpetually on the defensive these days.
There's a small handful of exceptions to this industry norm, though. Chipotle Mexican Grill (NYSE: CMG) is one of them. If you've got an extra $1,000 to put to work, it would be a great growth stock to scoop up, particularly given that shares are currently down 16% from last month's peak. That discount isn't apt to last very long.
What makes Chipotle Mexican Grill different than all the rest
If you're not familiar with it, Chipotle Mexican Grill is a popular Tex-Mex fast-casual eatery. The company operates nearly 3,500 locales, offering custom-built burritos, tacos, and bowls. There are other brands similar to it, like Qdoba and Moe's. Chipotle is far bigger than any of its direct competitors, and it's enjoying the advantages of its larger scale.
That's not the only nuance that makes this name a surprisingly compelling investment prospect. Just as important is its menu and the stores' preparation process.
If you've never been inside a Chipotle, you may not realize every single order is made via an assembly line. Chipotle's patrons request the freshly prepared ingredients they want (or skip the ones they don't want) to the employee preparing their burrito, bowl, or salad as it's being ferried from one end of a long counter to another. Despite the assembly line prep, the ingredients are prepared and cooked on-site and not far in advance of usage in the meals, just like any other restaurant.
This approach leads to two standout outcomes. First, it's actually easier to offer fresh, high-quality (and altogether new) ingredients when they're supplied and prepared in this manner, offering customers something they usually don't get from other fast-food chains. Second, the human-powered assembly line lends itself to efficiency as well as cost-effectiveness by being simpler than it seems to be on the surface.
The financials these restaurants generate confirm this dynamic.
Still growing despite the doubt
If you've been keeping tabs on Chipotle Mexican Grill of late, then you've likely already heard suggestions that its best days are behind it. As a recent New York Post headline reads, "We're all suddenly over Chipotle."
Except the numbers say otherwise.
Take the company's first-quarter top line as an example. It improved 14.1% year over year, driven higher by same-store sales growth of 7%. These numbers extend growth trends that have been underway since the pandemic wound down. Operating profit margin rates are widening despite continued cost inflation as well. Chipotle's never been more profitable than it is right now on an absolute basis. Its profit margin rates are also back near their 2015 highs before the company began spending so heavily on marketing and other growth-driving initiatives.
CMG Revenue (Quarterly) data by YCharts.
Clearly the company's doing something right.
More of the same is in the cards, too. Analysts are calling for the same sort of sales growth at least through 2028, with earnings growth projected to improve at an even faster clip.
Data source: StockAnalysis.com. Chart by author.
Given how Chipotle's menu offers the fresh, high-quality non-burger fare that consumers are increasingly craving, there's no reason to believe these expectations are out of line or out of reach.
Buy Chipotle stock, and don't tarry
Chipotle stock's suffered its share of setbacks over the course of the past few years, for the record. But these dips have actually been attractive entry points into the stock's advance, reflecting the company's continued growth during this time. The pullback from June's peak is another such opportunity to plug into this bigger-picture trend. Just know that the lull isn't likely to last for long in light of the restaurant chain's track record and growth potential.
This might help: Although investors have collectively decided Chipotle shares are worth markedly less now than they were just a month earlier, the analyst community disagrees. They've held on to their consensus price target of nearly $68 per share, which is more than 17% above the stock's current price. If nothing else, newcomers will be stepping in with the benefit of analysts' resilient optimism.
Chipotle Mexican Grill is scheduled to report its second-quarter results after the market closes on July 24. Analysts are calling for earnings of $0.31 per share on sales of $2.94 billion, up from the year-ago comparisons of $0.25 in EPS and $2.53 billion in sales.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
