2 weeks Ago By [email protected] (Neil Patel)
The Federal Reserve has finally started what many hope is a consistent rate-cutting cycle. And with this new accommodative stance, investors are probably looking to gain exposure to more economically sensitive businesses. Putting capital to work in the restaurant sector could be of interest.
Some investors might appreciate the monster success of Chipotle Mexican Grill ( CMG -1.22% ) , while others could believe that the recent troubles at Starbucks ( SBUX -0.11% ) are temporary.
But which of these top restaurant stocks is the better buying opportunity right now? The case for Chipotle One obvious reason investors should consider buying Chipotle shares is the company's impressive growth trajectory. In the past three years, the store count has expanded by 677, with the total now sitting at 3,530. The pace of openings appears to be accelerating.
Management believes that over the long term, there could be 7,000 locations in North America . Given that the average store does $3.1 million in annual sales and carries a superb operating margin of 28.
9%, it makes sense to keep the aggressive expansion going. Over time, overall revenue and earnings are set to be much higher than they are today. This might be a restaurant chain, but that doesn't mean that it completely ignores technology.
In fact, this business has done a fantastic job at integrating technology into its operations with its digital app. Launched in 2019, the rewards program had 40 million members as of March 31. And as part of the store-opening strategy, Chipotle has introduced order-ahead drive-thru lanes, which increase new restaurant sales, margins, and returns.
The business is finding innovative ways to automate various tasks. For example, the Autocado is a robot that can cut and peel avocados. This could save time and boost throughput.
While most retail-based companies, especially restaurants, operate with razor-thin margins, Chipotle completely bucks this trend. Last year, the operating margin was a stellar 15.8%.
A combination of prudent expense management and pricing power has helped profitability. The case for Starbucks Brian Niccol, who was Chipotle's CEO since early 2018, is now in the top job at Starbucks . This fresh leadership change is one key reason to buy shares of the leading coffeehouse chain.
Niccol deserves credit for fixing Chipotle's business following its health scare, with a focus on effective marketing and improving store operations. His success in the restaurant industry could certainly help turn things around at Starbucks. In the fiscal third quarter (ended June 30), Starbucks reported a 3% global same-store sales dip.
That's definitely not encouraging, and it could mask the fact that this is one of the world's strongest brands. That powerful name recognition is what makes up Starbucks' economic moat . The business has been able to sell a commodity, coffee, at premium prices because of its ability to resonate with consumers.
That brand is precisely what has kept Starbucks relevant throughout its history. And it's what will help maintain the company's position far into the future. In other words, I believe there is a minimal threat of disruption.
As Niccol says, "Starbucks is a beloved brand." There are currently 39,477 Starbucks stores across the globe. Despite this ubiquity, the business still sees meaningful growth potential.
By 2030, the goal is to have 55,000 locations open. There's a huge opportunity to further expand in China. But even in the U.
S., executives plan to grow the footprint to 20,000 stores over the long term from 16,730 today. Don't forget valuation Chipotle might be operating on stronger footing.
But I believe that Starbucks is the better investment right now, mainly due to its lower valuation. Its price-to-earnings ratio (P/E) of 27 is well below Chipotle's 57. But if the Tex-Mex chain's shares dropped to a P/E below 30, then it would be a no-brainer buying opportunity.
However, I'm not sure if the valuation will get that low anytime soon, if ever. Consequently, Starbucks is the better stock of these two choices with its greater upside potential..
