With all the options consumers have for spending their discretionary income today, it pays as an investor to look closely at those that keep us happy and coming back for more. And I think it goes without saying that Americans, in particular, couldn’t do without two of our primary food groups: coffee and burritos.
So let’s take a closer look at arguably the two best stocks to play that trend: Starbucks (NASDAQ:SBUX) and Chipotle Mexican Grill (NYSE:CMG).
Which is the better buy today?
Unwrapping Chipotle’s promise
Chipotle Mexican Grill has rebounded nicely in 2017. The fast-casual restaurant chain boasts a nearly $12 billion market capitalization after watching its shares climb 10% year to date, thanks largely to recent progress in Chipotle’s ongoing turnaround.
Chipotle’s revenue last quarter climbed an impressive 28.1% year over year, to $1.069 billion, including a 17.8% increase in comparable-restaurant sales. Of course, that figure was pitted against a painful performance in the same year-ago period, when the company was still reeling from multiple food-borne illness scares that devastated restaurant traffic. On the bottom line, Chipotle delivered quarterly net income of $46.1 million, or $1.60 per share, swinging from a first-quarter 2016 loss of $26.4 million, or $0.88 per share. And Chipotle continued building its restaurant footprint all the while, opening 57 new locations over the past year to bring its base to over 2,300.
Today, according to Chipotle CEO Steve Ells, the company is benefiting from “sweeping changes throughout the organization” aimed at improving the guest experience, as well as even more intense food quality measures to ensure it won’t suffer a repeat of the events that made this recovery necessary in the first place.
But two weeks ago Chipotle stock pulled back after the company “reiterated and clarif[ied]” its guidance, leaving several Wall Street analysts to tweak their models based on the chain’s expectations for increased food and marketing costs. As fellow Fool Adam Levine-Weinberg pointed out, however, Chipotle didn’t actually change its 2017 guidance at all, but rather — just as its filings indicated — reaffirmed its expectations even in spite of concerns over a payment card security breach in late March and early April.
In the end, I think investors should be happy with the progress Chipotle continues to make. And with shares trading at roughly 35 times this year’s expected earnings — an acceptable premium given its current growth rates — I believe the stock should have little trouble heading higher from here.
Sipping on Starbucks’ momentum
Meanwhile, with its $84 billion market cap as of this writing, Starbucks remains every bit the dominant global coffee industry giant investors have enjoyed for the past two-and-a-half decades. Revenue last quarter climbed 6% year over year to $5.3 billion, and earnings per share increased an even better 15% to $0.45. Both set new company records in the process.
There was a caveat in Starbucks’ strong results, however; comparable-store sales grew less than expected at 3%, as a 4% increase in average ticket size was partially offset by a 2% decrease in total transactions. That said, Starbucks also noted that comps were skewed due to order consolidation stemming from changes in its new Starbucks Rewards program. Adjusted for the effects of that consolidation, average ticket size was up 3% while transactions were flat compared to the previous year.
Starbucks management also voiced optimism for the year ahead. Thanks to investments the company is making to increase throughput and further “premiumize” the Starbucks brand, U.S. comparable-store sales accelerated sequentially with each month last quarter ending at around 4% in March. And comps continued to accelerate into April.
For those wondering whether Starbucks can possibly continue to grow from here, the company maintains an active goal of opening at least 2,000 stores around the globe each year. It added 427 new locations last quarter alone, bringing its total store base to nearly 26,200.
As it stands, Starbucks stock trades at around 24 times this year’s expected earnings. I think that’s a fair price assuming the company indeed continues to accelerate its revenue and earnings growth as this year progresses, and considering the stock offers a healthy dividend yielding 1.7% annually at today’s prices. If Starbucks can maintain both its pace of new store growth and the comps momentum it exhibited at the start of the current quarter, shares should easily beat the market going forward.
So which is the “better buy” today? I think that depends on your goals as an investor. On one hand, Starbucks is obviously thriving as it pushes forward its ambitious agenda for global growth, and investors willing to see that through over the long term can enjoy relative stability with its dividend and strong profitability in the process.
But I’m personally even more enticed by the prospect of Chipotle gradually reversing its fall from grace, especially in light of what I believe is the market’s fundamental misunderstanding of its guidance clarification last month.
That’s not to say there won’t be bumps in the road for Chipotle along the way. Another unforeseen food-borne illness scare, however unlikely, could easily propel the stock to historic lows. But if Chipotle can keep moving forward and deliver on its promises to both diners and investors, and with shares trading just above half their all-time high set in 2015, I think Chipotle Mexican Grill is the better buy today.
– Stock investment