Although Chipotle Mexican Grill has been giving away burritos by the handful to lure back customers, it's not time to back up the truck on its stock yet.
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With shares of Chipotle Mexican Grill still down 40% from their 52-week high, the fast-casual burrito bowl chain is poised for a comeback -- eventually. Although it's been given the all-clear sign by health authorities, the outbreak of foodborne illness cases that have dogged it since last fall are about to cause Chipotle to post its first quarterly losssince becoming a publicly traded company. It estimates per-share losses will total $1, whereas last year it recorded profits of $3.88 per share.
While it's fully expected to recover and move beyond the hit to profits giving away free burritos causes, there may still be some air between it and the bottom. The chain has seemingly handled the issue fairly responsibly and in a transparent fashion, but there are still investigations going on into who knew what when, so it may be some time before customers return, sales grow, and margins widen. The day is coming -- it just isn't here yet.
So while Chipotle Mexican Grill isn't a bad company, or even a bad investment for those with a sufficiently long investing horizon, I think those looking for solid restaurant plays should consider three other chains as better bets -- Cracker Barrel , Wendy's , and Yum! Brands .
Family dining chain Cracker Barrel is have a cracker jack year so far, with shares soaring more than 20% in 2016 as it continues to perform above expectations. The chain's business is still expanding, just not at the same rate it was, but it was able to compensate for the slower increase in store traffic -- it blames the "snow in winter" effect -- by having those who did frequent its restaurants spend more.
Cracker Barrel is also benefiting from the easing up of commodities prices, because it had hiked prices last year by almost 3% to counteract their impact,allowing it to raise its full-year per-share guidance to $7.40 to $7.50 from its previous estimate of between $7.15 and $7.30 per share.
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Yet Cracker Barrel isn't just a restaurant; it also operates a country store. That business saw comparable sales rise 2.6% in the quarter, ahead of the prior period's 2.4% increase. Like the restaurant business, though, it also saw some harsh weather result in fewer sales being made, particularly in January. Yet having the diversity has also offset some of the sluggishness in food sales, meaning it ought to continue being able to wait out its customers' return with the warmer weather.
The burger chain has had its shares of ups and downs over the past year, but its continued progression toward becoming a less capital intensive company as it refranchises its restaurants suggests its profit picture will also keep improving.
Wendy's is credited with launching the bundled meal promotion last October that caused several rivals to report lost business. Although both McDonald's and Burger King copied the idea (albeit with some differences), it is Wendy's 4 for $4 promotion featuring a junior bacon cheeseburger, four chicken nuggets, small fries, and a small drink that has gained traction.
Sandwiches like the Baconator have made for some strong growth possibilities at Wendy's, and though you'll have to pay up for its stock, the burger chain still looks like a good deal. Image source: Helga Weber.
McDonald's has since dumped the promotion,substituting in a Monopoly game promo instead, and Burger King has basically kept quiet about the impact its package deal is having on its operations, but Wendy's says the promopermitted it to firm up estimates for full-year comparable sales growth to the high end of its guidance.
While investors should expect the burger chain's profit picture to improve, they should do so with the understanding that Wendy's stock isn't exactly bargain-basement material, either. At 23 times earnings and 27 times estimates, it's carrying a bit of a premium to McDonald's (but a discount to Burger King parent Restaurant Brands International). Yet it's in better shape than either right now, and I see it as being worth the price the market is charging for that earnings growth.
The owner of KFC, Pizza Hut, and Taco Bell knows full well what Chipotle Mexican Grill is going through, having suffered through not one, but two, food quality scandals that disrupted its growth plans in China. So deep was the effect that it is now spinning off its China division to minimize its exposure to the vagaries of that market, and that's but one of the good reasons why investors should consider it.
The spinoff won't be without repercussions. China accounts for 53% of Yum! Brands total revenue and 39% of its operating profits, and though it is retaining an ownership stake in the new business, which will operate as a franchisee of the parent, it is also opening its first Taco Bellchain there, too.
The Mexican fast-food chain is also taking aim at McDonald's here at home, offering a $1 breakfast menu that targets what is arguably its rival's weak underbelly. While the McPick 2 menu was supposed to be its answer to critics who've complained it's ignored the value end of the menu in pursuit of millennials who've abandoned the burger chain, the fact it's now abandoned it gives Taco Bell a chance to further move into thebreakfast arena, which quickly grew last year to account for 6% of the chain's revenues.
Yum! Brands has three brands that have strong name recognition and it is in the process of making them all increasingly profitable. With the risks of China minimized, the restaurant operator looks like a good bet for growth.
Don't just ignore Chipotle Mexican Grill
While the fast-casual burrito joint is currently depressed and will recover, Chipotle Mexican Grill still has a long road ahead of it before it's healthy once more. In the meantime, investors will be better served searching out better opportunities like the three stocks above.
The article Forget Chipotle Mexican Grill, Inc.: These 3 Stocks Are Better Buys originally appeared on Fool.com.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.
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