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Fine Dining

By Thomas Scarlett on August 27, 2015

While the financial markets continue to gyrate wildly, there was some good news on a broader economic front this morning. The U.S government revised its estimate of economic growth in the second quarter of 2015 to an annualized rate of 3.7 percent. That’s more than a full percentage point higher than the initial reading of 2.3 percent reported by the Commerce Department in late July.

So economic activity is happening out in the heartland. Some of that money is going for discretionary purchases: leisure activities, nicer clothing and eating out.

Dining out is about as discretionary a purchase as you’ll find. When consumers are feeling confident, you’ll find them crowding into restaurants. When they’re not, home-cooked dinners and brown-bag lunches are the order of the day.

The last recession was no exception: faced with surging unemployment, a crumbling real-estate market and plunging stock prices, many people quickly decided that restaurant meals no longer fit into their budgets.

The sluggish recovery initially did little to help lure diners back: over the five years leading up to 2014, sales climbed an average of just 1.5% annually. At the same time, consumer tastes have changed quickly, particularly when it comes to healthier and locally sourced food.

Now there are signs the lean times may be fading. IBISWorld, for example, estimates that restaurant revenue rose 4.5% in 2014, to $98 billion—well above pre-recession highs.

The National Restaurant Association recently released its latest restaurant performance index (RPI) reading, and the trend continues to point upward.

Chipotle Mexican Grill (NYSE: CMG) is one company with very promising fundamentals.

Chipotle offers high-quality food that’s both speedily prepared and swiftly served, and the restaurant uses top-notch ingredients. You do that on a regular basis, and it’s no wonder your revenues grow 18% annually and you have opened 1,500 restaurants across the U.S.

According to a just-released earnings report, some highlights for the second quarter of 2015 as compared to the second quarter of 2014 include: revenue increased 14.1% to $1.2 billion; comparable restaurant sales increased 4.3%; restaurant-level operating margin was 28.0%, an increase of 70 basis points; net income was $140.2 million , an increase of 27.1%; earnings per share were $4.45 , an increase of 27.1%; and the chain opened 48 new restaurants.

The company follows its “food with integrity” mantra, which involves emphasizing organically grown produce and naturally raised beef. That helps it stand out from other chains, but it also means higher ingredient costs (33.6% of revenue in the latest quarter).

“We feel good about our second quarter results, as our revenue, average restaurant sales, and comparable restaurant sales have continued to grow even comparing to a very strong 2014. The strength of our business is the product of our unique food culture and unique people culture, and we constantly find ways to improve. Our relentless focus on the key drivers of our business allows us to continue to change the way people think about and eat fast food,” said Steve Ells, the company’s chairman.

Chipotle continues to add to its offerings: it partnered with two restaurateurs to launch Pizzeria Locale, a pizza outlet in Denver that also uses all-natural ingredients. It may open two more. The company also recently began offering catering.

Of course, there are many other restaurant chains out there competing for consumers’ dollars. However, this company’s focus on all-natural foods and expansion (it plans to open about 120 outlets this year) put it in a great position to grab market share as restaurant sales rise.

The company’s price earnings ratio is around 44, which may seem a tad high. But when compared to forward earnings, the ratio is more like 32. The recent volatility in the stock price has created a buying opportunity for new investors, especially considering how expensive each individual share is.

We think Chipotle Mexican Grill rates a buy up to 745.

Tom Scarlett is an analyst with Investing Daily and Personal Finance.

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