3 Restaurant Stocks Serving Mouthwatering Growth

By Markets Fool.com

The restaurant industry is notoriously challenging and competitive, but it can also be enormously profitable for well-managed industry players who keep their customers satisfied and hungry for more. Chipotle Mexican Grill , Buffalo Wild Wings , and El Pollo Loco are three restaurant stocks delivering tasty meals for their customers and mouthwatering growth for investors.

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Chipotle Mexican Grill
Chipotle is the growth leader in the particularly attractive fast-casual category. The company serves Mexican food, giving special emphasis on the quality and freshness of the ingredients. Sourcing for locally produced and organic ingredients is a considerable operational hurdle, and it has a negative impact on costs. However, Chipotle's "food with integrity" approach to Mexican cuisine is nothing short of a booming success.

Source: Chipotle Mexican Grill

The company has increased sales at an amazing speed of 19.3% annually through the last five years, and data for the September quarter confirms that the business keeps firing on all cylinders. Sales in the third quarter jumped by a jaw-dropping 31.1% on the back of a big increase of 19.8% in comparable restaurant sales.

Management expects comparable sales during 2015 to increase in the low- to mid-single digits, which is clearly reflecting the possibility of a slowdown to more sustainable growth rates in the middle term. Chipotle tends to underpromise and over deliver, and if history is any valid guide, there is a good chance that the company will beat its own guidance. Still, even if sales turn out to be near guidance, that would mean that Chipotle is clearly outperforming most competitors.

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This kind of growth does not come cheap, Chipotle trades at forward P/E ratio of more than 38 times earnings forecasts for 2015. However, the company is well positioned to grow into its valuation.

Management estimates it can increase the store base from nearly 1,700 restaurants to approximately 4,000 locations in the U.S. alone, and international markets are still practically untouched territory for Chipotle. Opportunities abound and everything seems to indicate that the company has years of spicy growth ahead of it.

Buffalo Wild Wings
Buffalo Wild Wings plays it simple, with tasty chicken wings, plenty of beer options, and ubiquitous screens to watch sports. However, simplicity does not make the company's customer proposition any less effective. On the contrary, Buffalo Wild Wings is a remarkably successful restaurant company.

Source: Buffalo Wild Wings

The company reported a big increase of 18.3% in total revenues during the third quarter of 2014. Company-owned restaurant sales jumped 18.5%, driven by a same store sales increase of 6% and 44 additional restaurants. Franchise royalties and fees grew 14.1% thanks to a same-store sales increase at franchised locations of 5.7% and 47 additional franchised restaurants at the end of the period.

Unlike Chipotle, Buffalo Wild Wings relies heavily on franchises. This means the company has less control over operations, but franchising makes international expansion much faster and efficient due to lower capital requirements. Buffalo Wild Wings opened its fourth franchise location in Mexico during the last quarter, and development is moving along in Dubai, Saudi Arabia, and the Philippines.

Though it's not as expensive as Chipotle, Buffalo Wild Wings sells for a demanding valuation; the stock carries a forward P/E ratio of nearly 30 times earnings forecasts.

El Pollo Loco
El Pollo Loco is the industry newcomer. The company had its IPO on July 25, and things were looking pretty exciting for El Pollo Loco back then. From an IPO price of $15 per share, the stock skyrocketed to more than $41 per share in a few days.

Source: El Pollo Loco

El Pollo Loco sales during the third quarter increased 8.5% to $86.6 million, and systemwide comparable restaurant sales grew 7.9% -- including a 6.4% increase at company-operated restaurants and a 9.1% increase at franchised locations.

But despite El Pollo Loco's healthy financial performance for a smaller size chain, it's important to note that the company's growth lags behind its rapidly growing aforementioned peers, Chipotle and Buffalo Wild Wings. (All things equal, a smaller company should be able to grow at faster rates.)

On the other hand, the company owns approximately 400 restaurants, which allows for enormous room for expansion in the long term, and management has a goal of 2,300 locations.Besides, the stock has plunged by more than 48% from its highs of the year, and it now trades at a moderate forward P/E ratio of 32 times earnings forecasts for 2015.

Whereas El Pollo Loco does not offer the explosive growth rates as Chipotle and Buffalo Wild Wings, it still offers investors the chance to invest in a successful restaurant business at an early stage and for a reasonable price.

The article 3 Restaurant Stocks Serving Mouthwatering Growth originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and Chipotle Mexican Grill. The Motley Fool owns shares of Buffalo Wild Wings and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.