CMG Stock: Is Chipotle Stock a Buy After Earnings? 3 Pros, 3 Cons

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By any measure, Chipotle Mexican Grill, Inc. (NYSE:CMG) has been a success story. CMG stock has gained 22% over the past year, same-store sales growth is strong, and CMG’s attractive business model is in line with consumer fast-casual dining trends.

Chipotle Mexican Grill (NYSE: CMG)At a time when fast food rivals like McDonald’s Corporation (NYSE:MCD) are struggling, CMG’s 16% surge in same-store sales is a very bright spot. But for investors, is it time to dine or dash? Here are three pros and three cons for CMG stock.

CMG Stock Pros

CMG rocked earnings: Last week, CMG reported earnings per share (EPS) of $3.84 in the fourth quarter — beating analysts’ estimates by 10 cents per share. Even better news: CMG grew earnings by more than 50% compared to the same quarter a year ago. Although Chipotle’s $1.07 billion in revenue for the quarter missed analysts’ estimates slightly, the top line still improved by nearly 27%.

Same-store sales look solid: The company’ same-store sales increased by 16.1% on menu price increases and stronger traffic. That’s great news for CMG shareholders, despite being slightly under analysts expectations.

Chipotle is positioned for changing consumer tastes: Chipotle’s commitment to fresher, more sustainable products and processes is not limited to its Mexican-inspired success — the company is applying its model to ShopHouse and Pizzeria Locale concepts. According to a new report from the National Restaurant Association, three-quarters of consumers say they are more likely to visit a restaurant that offers healthy options; seven in 10 say they also order more healthful options in restaurants than they did two years ago.

CMG Stock Cons

Chipotle’s twitter hack revives 2013 PR stunt: Chipotle’s Twitter account was hacked over the weekend, and the company had to apologize for racist and abusive comments. While any business is a potential target for hackers, this isn’t CMG’s first bad tweet. Back in July 2013, Chipotle’s Twitter account also was targeted — or so it seemed. After putting the word out that its Twitter account was hacked, CMG admitted to Mashable that it had faked the hack as a PR stunt to draw attention to the company’s 20th anniversary promotion.

Animal welfare triggers pork supply crunch: Last month, CMG suspended pork purchases over concerns that the unnamed supplier was not adhering to the requirement that pigs used for carnitas must be raised in a humane environment. The result: CMG had to stop serving carnitas at a third of its 1,800 restaurants. CMG lowered its guidance for the first quarter down from $3.93 to a range of $3.84 to $3.87 because of the potential risk to sales. The company also lowered its same-store sales growth projections from 11% to roughly 10%.

Higher food costs could be a headwind: Rising food costs are the bane of the restaurant industry’s existence, and Chipotle is no exception: Food counted for 35% of revenue in the fourth quarter. In the past, CMG has handled the challenge by raising prices; it seems likely for Chipotle to seek price hikes on some menu items — particularly beef — by mid-2015. The specter of price increases — and the potential impact on sales — sent CMG shares down 7% after the earnings release.

Bottom Line for CMG Stock

Should you buy CMG stock? Yes. CMG is a sound investment for the long term and is a buy now. Although CMG’s price to earnings growth (PEG) ratio of 2.11 and forward price-to-earnings ratio of 33 make the stock look overvalued, Chipotle remains one of the sector’s more attractive growth plays.

CMG stock is down more than 5% over the past two weeks, and that dip presents a buying opportunity now. While it is clear that Chipotle’s earnings growth rate of more than 50% is not sustainable, CMG is serving up strong operating cash flow, impressive revenue growth and impressive growth in net income and margins.

But perhaps the best reason to buy CMG is that it is cashing in on consumers’ changing tastes for healthier fare. The stock has gained 23% over the past year and looks appetizing for investors now.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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