CMG Stock – 5 Reasons to Buy Chipotle on This Dip

Chipotle stock is still growing fast, and bears are overstating the recent sales miss

Chipotle Mexican Grill, Inc. (CMG) has slumped by double-digits in the last week or so after reporting disappointing revenues.

chipotle-cmg-stockHowever, while Chipotle earnings didn’t show the growth Wall Street wanted, it’s important to recognize that CMG stock remains one of the biggest growth stories in recent memory — and investors who hastily dump Chipotle stock because of a minor sales miss may regret it.

Here’s why I think CMG stock will continue to rise in 2015 despite the admittedly rough showing of late:

1. Revenue Slowdown Was Expected

Investors should remember that during the Chipotle earnings report last October, the burrito boss warned sales growth could slow to mid-single digits. So the fact that revenue “only” climbed about 26.7% instead of the 27% forecast for Q4 shouldn’t be a huge surprise.

2. Chipotle Sales Are Sticky

Also of note is that underneath this impressive growth for revenue (even if it missed expectation) is “comparable sales” improvement that is the envy of the restaurant world. That 16.8% growth in restaurants open 13 months or more shows CMG stock isn’t just relying on new openings to grow, and it’s not over-expanding or at risk of a crash when it reaches a larger scale.

3. CMG Stock has Strong Margins

Looking past sales, restaurant margins rose to 26.6% from 25.6% — a pretty healthy clip. What’s more, full-year margins improved to 27.2% for all of fiscal 2014. That’s a good sign long-term, since keeping food costs down has been a risk to CMG stock in the past. In fact, thanks to strong loyalty, Chipotle has been able to successfully raise prices without hurting momentum — a great sign.

4. Chipotle Pork Problems Are Minor

Recently, Chipotle suspended pork sales at about a third of its more than 1,700 restaurants because of animal-welfare issues. That may create a minor headwind in the short term, but this is hardly serious threat or a long-term supply chain issue. Recalls and supply issues like this are a reality for all restaurants, and are easily overcome.

5. CMG Isn’t Just Kids Stuff

Bears think the restaurant chain is just a fad, dependent on fickle millennials who will flee when they get bored. But while it’s true, according to a Brand Keys survey from late 2014, that restaurants like Panera Bread Co. (NASDAQ:PNRA) and Chipotle top the list of millennial favorites, it also shows surprising potential with older diners as well. For instance, the survey reported an 18% drop in baby boomer visits to traditional “fast food” joints like McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) franchise Taco Bell. What’s more, Brand Keys reported that “a third of the [boomers] sample (32%) called ‘quality food’ something that they attribute more to the fast-casual restaurants like Panera and Chipotle than they do to the traditional fast-food brands.”

Sure, the forward P/E of about 31 seems risky. But there are few other growth options at all on Wall Street, let alone in the restaurants space. Furthermore, fast-growing restaurants such as Papa John’s International (NASDAQ:PZZA) and Noodles & Co (NASDAQ:NDLS) boast earnings multiples that are even higher.

Put simply, CMG may be your best bet at growth in 2015 considering the challenges elsewhere. I wouldn’t sweat the sales miss too much.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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