Is Chipotle Mexican Grill the Future of Fast Food?
Chipotle Mexican Grill (NYSE: CMG) could be the future of fast food because of its business model. To explain, Chipotle sells high-value food (burritos) that are perfect for takeout.
In fact, Chipotle’s business model seems perfectly designed for modern American lifestyles. For instance, the higher-priced, high-quality food is well-attuned to growing income inequality.
Notably, upper-class incomes have been flourishing since 2000 while the middle class’s income is stagnating, Pew Research calculates. In addition, the percentage of middle-class Americans shrank from 56% to 52% between 1991 and 2016. Meanwhile, the upper class grew slightly from 17% to 19% during that period.
How Chipotle Mexican Grill is Driving Postmates’ growth
Moreover, Chipotle’s products are ideal for takeout delivery. Specifically, Postmates deliveries Chipotle food in most markets.. Postmates is the fast-growing app-based on-demand delivery service that recently filed for an initial public offering (IPO), CNN Business reports.
To explain, Postmates offers unlimited delivery for $9.99 or a month; or $96 a year, for orders over $15. Hence, the average mother can order a complete Chipotle meal for her family with free delivery through Postmates.
Postmates is not yet profitable, but the company is planning for a an $1.85 billion IPO in 2019. In addition, Postmates has raised $675 million in private equity.
Is Chipotle Mexican Grill growing?
Tellingly, Chipotle itself is experiencing steady growth. For instance, the number of Chipotle restaurants grew from 2,250 in 2016 to 2,408 in 2017, Stastia estimates.
Impressively, Chipotle’s footprint grew from 704 restaurants in 2007 to 2,408 in 2017. Thus, the number of Chipotles grew three fold in 10 years.
In addition, Chipotle’s revenues grew at a rate of 10.36% in 4th Quarter 2018. However, Chipotle’s gross profit shrank slightly in the same period falling from $228.75 million to $208.31 million.
Hence, Chipotle can expand its footprint quickly, but it has a hard time maintaining gross profits. On the other hand, Chipotle is still making money from that footprint.
Is Chipotle Mexican Grill Making Money?
Chipotle Mexican Grill (NYSE: CMG) still making money from its burritos. However, Chipotle is making less money than it did in 2017.
For instance, Chipotle reports a net income of $32.02 million and an operating income of $39.16 million for 4th Quarter 2018. However, Chipotle reported a net income of $43.79 million and an operating income of $69.03 million for 4th Quarter 2018.
On the other hand, Chipotle reported revenues of $1.225 billion for 4th Quarter 2018, and $1.110 billion for 4th Quarter 2017. Thus, it appears Chipotle is selling more burritos but making less money from them than in 2017.
How Much Cash does Chipotle Mexican Grill Have?
Not surprisingly, Chipotle is generating cash from its high-priced foods. For instance, Chipotle reports an operating cash flow of $129 million and a free cash flow of $51.66 million for 4th Quarter 2018.
Hence, I conclude that Chipotle will operate and grow for a long time because of that cash. Notably, Chipotle is in a good position to expand its footprint and work with new franchisees. In addition, Chipotle could have the resources to adapt to trends like the rise of delivery.
However, Chipotle’s cash stash is low but growing. For instance, Chipotle had $200.15 million in cash and equivalents and $426.85 million in short-term investments on December 31, 2018.
Thus, Chipotle had $707 million in cash at the end of 2018. In contrast, Chipotle had $538.55 million in cash at the end of 2017. Thus, Chipotle is slowly accumulating more cash.
Does Chipotle Mexican Grill Pay a Dividend?
Chipotle Mexican Grill (NYSE: CMG) has the resources to pay a handsome dividend if its management wishes.
However, Chipotle is choosing not to pay a dividend. It is easy to see why Chipotle is not paying a dividend. The company’s stock was trading at a ludicrous $637 a share on 13 March 2019.
Under these circumstances, it makes no sense for Chipotle to pay a dividend. To explain, the usual purpose of dividends is to make a stock more attractive to investors and increase its price.
However, Chipotle’s stock price is already high without a dividend. Thus, Chipotle will not pay a dividend soon.
Why Chipotle Mexican Grill is a Major player in fast food
My conclusion is that Chipotle is a good company with an overpriced stock. However, Chipotle’s growing cash and high market capitalization of $17.65 billion on 13 March 2019 will make it a major player in fast food.
To explain, Chipotle could have the resources for acquisitions or major growth if its management desires. In particular, I think acquiring a growing high-quality fast-food provider like Shake Shack Inc. (NYSE: SHAK) makes sense for Chipotle.
Specifically, Shake Shack had a market capitalization of only $1.965 billion and a stock price of $53.11 on 13 March 2019. Acquiring Shake Shack makes sense for Chipotle because companies sell high-quality fast food at slightly higher prices.
In addition, the two companies serve the same markets and neighborhoods so there could be synergy from combined locations. In particular, a combination Chipotle/Shake Shack store will be easier for delivery apps to service. To explain, a delivery person can pick up several orders at one store.
Why Chipotle Mexican Grill is a Company to watch
An even greater opportunity could be a Chipotle inside an Amazon Go or a Starbucks (NASDAQ: SBUX). To explain, Go is Amazon’s (NASDAQ: AMZN) cashierless highly automated experimental convenience store.
Intriguingly, Amazon Go and Chipotle target the same customers. For example, high-income urban professionals with a lot of cash but little time. Notably, Amazon is testing Go locations in affluent cities like Seattle, London, San Francisco, Chicago, and New York. Hence, a Go-type store with Chipotle makes sense. In particular, customers could pick up Amazon orders and burritos at the same time at such a combination.
Therefore, Chipotle is probably the future of fast food in the United States. That is high-quality, high-priced, and delivery-focused. However, Chipotle’s stock is still too high for my tastes.
Hence, Postmates stock could be a better investment after the IPO. Thus, I consider Chipotle a stock to watch rather than buy.