Is Chipotle stock a good buy?

In this article, we review Chipotle stock to determine if it’s a good buy, sell, or hold

Chipotle is a fast-casual Mexican restaurant located in the US, UK, Canada, and France. They were founded in 1993 and are headquartered in Newport Beach, CA. Today they have over 60,000 employees across 3,000 locations.

Tykr Rating
Chipotle Company History
Chipotle Business Model
Chipotle News
Chipotle Competition
Chipotle 4Ms
Chipotle Financials
Is Chipotle stock a good buy?

Tykr Rating

Summary: On Sale
Score: 16/20
MOS: 80%
Share Price: $1,313
Sticker Price: $6,602

Chipotle Company History

Founder Steve Ells attended the Culinary Institue of America in Hyde Park, NY. Thereafter we went to work as a line cook in San Francisco. While working in San Francisco, he noticed the popularity of taco stands. He then borrowed $85K from his father and opened the first Chipotle Mexican Grill in Denver, CO. Ells and his father calculated that they would need to sell 107 burritos per day to be profitable. After one month, the restaurant was selling over 1,000 burritos per day.
In 1995 they opened their second store using the cash flow of the first store. The third store was opened using an SBA loan.
To accelerate growth, Ells’ father invested $1.5M. Soon after, Ells created a board of directors and business plan as well as raised $1.8M. Ells originally planned to use the funds to open a Chipotle fine-dining restaurant but instead decided to focus on growing the fast-casual-themed Mexican restaurant it’s known for today.
In 1998 they opened in Kansas City, MO.
In 1998, Mcdonald’s made an investment in Chipotle. This investment allowed Chipotle to expand from 16 restaurants in 1998 to over 500 by 2005.
In 1999, Ells found Concentrated Animal Feed Operations (CAFOs) to be “horrific” and began sourcing food from open-range suppliers. This caused Chipotle to increase its prices to maintain profitability. This also created positive PR for the company.
In 2001, Chipotle released a mission statement called Food with Integrity which highlighted Chipotle’s efforts to increase its use of naturally raised meat, organic produce, and dairy without added hormones. Chipotle only uses leg and thigh meat for its chickens while breast meat is sold to Panera. Ells has gone on to testify before the US in support of the Preservation of Antibiotics for Medical Treatment Act, which aims to reduce the number of antibiotics given to farm animals.
In 2005, Monty Moran was appointed President and COO while Ells remained Chairman and CEO.
In 2006 the company went public. On the first day, the share price went up 100%. This resulted in the best stock IPO performance in 6 years and the second-best IPO performance for a restaurant, after Boston Market.
In 2006, McDonald’s fully divested from Chipotle and its other restaurant investments including Donatos Pizza and Boston Market.
In 2008, they opened their first location in Canada, specifically in Toronto.
In 2008, the company experienced a hepatitis outbreak from a location in La Mesa, CA which caused 22 customers to become infected. In the same year, the company experienced a norovirus outbreak in Kent, OH which caused over 400 people to become infected. In 2008 the share price went down from $146 to $49, a 66% decline. By 2012, the share price went to $400. Over a 700% return over 4 years.
In 2009, Monty Moran was promoted to co-CEO alongside Ells.
In 2009, the company became the eighth fastest-growing restaurant chain.
In 2010, the company became the third fastest-growing restaurant chain.
In 2010, US Immigration and Customs Enforcement (ICE) audited Chipotle’s Minneapolis restaurants and found that some employees had been hired using fraudulent documents. The company then fired 450 employees from the Minneapolis restaurants as a result of the audit, resulting in protests by local groups. In 2011, ICE expanded the audit to 60 restaurants in Virginia and Washington DC which resulted in 40 workers being fired. ICE then audited another 20 to 25 locations in Los Angeles and Atlanta. In response to these investigations, Chipotle hired the former director of ICE, Julie Myers Wood and high-profile attorneys Robert Luskin and Gregory Craig.
In 2011, they were serving 750,000 customers per day.
In 2011, Chipotle opened an Asian fast-casual restaurant named ShopHouse Southeast Asian Kitchen in Washington DC. They said this new restaurant would maintain the “food with integrity” model.
In 2015, there was an E. Coli outbreak at a Chipotle location in Seattle where 5 people were infected. In the same year, another norovirus outbreak occurred at a Simi Valley, CA location where 80 customers and 18 employees became infected. In the same year, a Salmonella outbreak affected 17 Minneapolis-area Chipotle restaurants where 64 people became infected. The share price went from $700 down to $250 over the duration of three years, a long painful decline for investors. From 2018 to 2020, the share price went from $250 to $920, a 268% increase.
After the food safety issues of 2015, Chipotle closed all its locations on February 8th, 2016 for an all-staff food safety meeting. The company hired a new head of food safety, who instituted changes including all employees washing hands every 30 minutes, all produce like onions, jalapeños, and avocados need to be immersed in hot water for 5 seconds to kill germs.
In 2016, Chipotle opened another break-off chain called Tasty Burger.
In 2016, Monty Moran stepped down from his role with Ells becoming the sole CEO.
In 2017, Ells stepped down as CEO and the company increased its advertising spend by offering discounts to customers to encourage them to come back. Same-store sales increased by 17.8% in Q1 of 2017.
In 2017, both ShopHouse Southeast Asian Kitchen and Tasty Burger closed due to poor performance.
In 2018, Taco Bell CEO, Brian Niccol replaced Ells as CEO while Ells remained Chairman. Many industry analysts praised Niccol’s appointment saying that Chipotle “needed new blood”. The stock increased by 12% as a result of this announcement alone.
In 2018, the company relocated its headquarters from Denver, CO to Newport Beach, CA.
In 2018, the company announced the closure of 65 under-performing locations.
In 2021, the share price hit an all-time high of $1,937. If you would have bought shares in 2018 at $250, your total returns over 3 years would have been 674%.

Chipotle Business Model

How does Chipotle make money?

Unlike most fast food business models, Chipotle doesn’t franchise its stores. Some of the most popular franchises around the world include McDonald’s Subway, KFC, Pizza Hut, and Starbucks.

Franchising is a great way to expand operations by putting risk on the franchisee. In other words, a qualified candidate can raise money through investors or take out a bank loan to open a franchise. The franchiser (for example McDoland’s corporation) shares profits with the franchisee (The person who took out a bank loan). It’s a win-win for growth but the franchiser makes less profit per store.

With Chipotle, they generate enough free cash flow to help open additional stores on their own. A lot of credit should be given to the leadership team for running a highly profitable restaurant operation.

For context, over 90% of restaurants fail within the first year. This is one of the hardest business models to sustain because of high food costs and payroll costs. At the end of the day, most restaurant owners make less than the average salary in the US. Based on policyadvice.net, the average US wage in 2019 was $51K. This article from toasttab.com states that restaurant owners can earn between $24K and $150K a year but most fall closer to the low end of that spectrum. Running a highly profitable restaurant operation is difficult but Chipotle shows others how it’s done.

Chipotle News

This article from stockmarket.com lists 5 restaurant stocks to watch in 2022 including Sweetgreen, Dutch Bros, Briner International, McDonald’s, and Chipotle. In the latest earnings report, Chipotle’s revenue grew 22% year-over-year and EPS increased 60% year-over-year. They also announced they plan on opening close to 250 new restaurants in 2022.

This article from zacks.com suggests investors should hold Chipotle’s stock for the long term even if wages are increasing. One contributor to the continuous growth is the digital ordering system which has greatly improved store operations.

This article from forbes.com states that Chipotle is a pacesetter in the world of restaurant technology. If someone wants to start a restaurant, Chipotle is the benchmark to aim for. In fact, technology plays a key part in maintaining efficient operations. CTO Curt Garns said “The growth of the business requires us to invest more in technology. Our digital business is over three times bigger than it was pre-pandemic and it was 25% bigger in 2021 versus 2020, so you’ll see increases in the compute required to run the digital business just based on growth”.

This article from fool.com lists 5 stocks investors can confidently invest in right now including MercadoLibre, Twilio, ZIM Integrated Shipping Services, Disney, and Chipotle. Chipotle’s online delivery technology helped this company continue to grow over the last two years, as most restaurants slowed or shut down due to Covid-19.

Chipotle Competition

Chipotle (CMG)

Summary: On Sale
Score: 16/20
MOS: 80%
Share Price: $1,313
Sticker Price: $6,602
Revenue: 7.5B
Stores: 3,000

McDonald’s (MCD)

Summary: Watch
Score: 15/20
MOS: 1%
Share Price: $222
Sticker Price: $225
Revenue: $23B
Stores: 38,000

Apollo Global Management (APO) – Owns Qdoba, Chuck E. Cheese, The Fresh Market, and more.

Summary: Watch
Score: 12/20
MOS: 32%
Share Price: $60
Sticker Price: $88
Revenue: $5B
Stores: 700 (Qdoba), 612 (Chuck E. Cheese), 159 (The Fresh Market)

Yum! Brands (YUM) – Owns KFC, Pizza Hut, Taco Bell, and more.

Summary: Watch
Score: 12/20
MOS: 1%
Share Price: $115
Sticker Price: $116
Revenue: $6B
Stores: 24,104 (KFC), 18,000 (Pizza Hut), 7,000 (Taco Bell)

Chipotle 4Ms

MOS (Margin of Safety): For a restaurant, the financials of Chipotle are incredible. A 16/20 and MOS of 80% shows how well this company is operating. On the financials alone, this stock is worth a look.

Meaning: There are two key highlights with this company. First, they do not operate a franchise model which means they do not split revenues with franchise owners. Yes, each location generates its own revenue but the profit per store for the corporation is higher because Chipotle carries the risk when opening each store. That risk is paid for by the free cash flow. This is impressive on its own. Second, they are a restaurant market leader with technology. As long as they continue to place technology as a high priority, this company will most likely continue to grow.

Moat: The most direct competitor to Chipotle is Qdoba which only has 700 stores vs Chipotle’s 3,000 and it looks like Chipotle’s technology is superior to that of Qdoba’s. Aside from Qdoba, running a restaurant is difficult and in many cases investing in restaurants can be somewhat risky. Due to high food and labor costs, the expectancy to generate massive returns on the stock are low but Chipotle has proven to generate returns over some years that are comparable to fast-growing tech stocks.

Management: Brian Niccol has served as CEO since 2018 and Chairman since 2020. Prior to Chipotle, he served in multiple roles at Taco Bell including CEO, Chief Marketing and Innovation Officer, and President. He also served in multiple roles at Pizza Hut including GM and CMO. Prior to Pizza Hut, he served 10 years at Procter & Gamble. Some of the awards he’s won include Fortune’s ‘Businessperson of the Year’ (2019), Bloomberg’s ‘People who Defined 2019’ (The Bloomberg 50), EatingWell’s American Food Heroes (2021), Comparably’s ‘Best CEO’s (2019), Best CEOs for Women and Diversity (2020) Orange County Business Journal’s ‘Business People of the Year’ (2020), as well as named ‘Leader of the Year’ by Restaurant Business magazine (2020), Nation’s Restaurant News’ The Power List (2021) and a ‘Distinguished Alumni’ by University of Chicago’s Booth School of Business (2020). Overall, Niccol is a perfect fit for CEO. His previous experience leading other large food chains is a key contributor to the continuous growth of the company.

Chipotle Financials

Now let’s take a look at the financials to get us closer to determining if Chipotle stock is a good buy. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2018: $4.8B
2019: $5.5B
2020: $5.9B
2021: $7.5B
Revenue has consistently increased year-over-year which is a great sign.

Net Income (Found on the Income Statement)

2018: $176M
2019: $350M
2020: $355M
2021: $652M
Net Income has significantly increased in 2021 which is a great sign.

EPS (Found on the Income Statement)

2018: 6.35
2019: 12.62
2020: 12.74
2021: 23.21
EPS has significantly increased in 2021 which is a great sign.

Free Cash Flow (Found on the Cash Flow Statement)

2018: $334M
2019: $387M
2020: $290M
2021: $839M
Free Cash Flow has also significantly increased in 2021. Another great sign.

Total Assets (Found on the Balance Sheet)

2018: $2.2B
2019: $5.1B
2020: $5.9B
2021: $6.6B
Total Assets have consistently increased. Another great sign.

Total Liabilities (Found on the Balance Sheet)

2018: $824M
2019: $3.4B
2020: $3.9B
2021: $4.3B
The Total Liabilities have increased which is okay. We know restaurants carry high liabilities due to payroll.

Total Debt (Found on the Balance Sheet)

2018: $0
2019: $2.8B
2020: $3.1B
2021: $3.5B
The debt has increased which is okay. These are most likely bank loans to help cover the fast growth which requires investments in food chain supplies and the covering of payroll.

Total Equity (Found on the Balance Sheet)

2018: $1.4B
2019: $1.6B
2020: $2B
2021: $2.2B
The Total Equity has slightly increased which is okay.