There’s no reason to dance around the truth: Starbucks Corporation (NASDAQ:SBUX) performance over the last few years has been nothing short of disappointing, but it’s been far better than Chipotle Mexican Grill, Inc. (NASDAQ:CMG). However, Chipotle stock is up 11% so far in 2018 to Starbucks’ 2% decline; can it keep up the pace?
I actually feel optimistic on Chipotle’s future, especially now that Brian Niccol is serving as the company’s CEO. He successfully led Taco Bell over the past three years as its CEO. Previously, he also alternated between marketing and management roles at Pizza Hut, Taco Bell and Yum! Brands, Inc. (NYSE:YUM).
Chipotle has already poured a lot of capital into its food-sourcing supply lines, as it continues to believe in sustainability and natural foods. I don’t disagree with that viewpoint, but it can’t come at the expense of sick customers. While the company has done a good job over the past few years (its last major outbreak was in December 2015) it still has an image problem, as various reports have popped up since then.
That’s where Niccol can come in, with his deep experience in marketing and branding. Whether that comes in the form of new menu items or convincing ad campaigns, he needs to find an innovative way to get traffic back through the door.
So What About Starbucks?
The reason I mention Starbucks is simple: It operates in a similar fast-casual dining environment as Chipotle. While Starbucks has struggled — shares are up just 15% over the past three years — Chipotle stock is down more than 50%. A longer view magnifies the outperformance: SBUX stock is up 96% over the past five years while CMG stock is up just 1.3%.
Here’s a look at a few other key metrics:
| Starbucks | Chipotle | |
| Gross Margins | 59.3% | 16.9% |
| Operating Margins | 18.5% | 6.1% |
| Revenue growth ’18 and ’19 | 10.7% and 9.5% | 8.3% and 7.6% |
| Earnings Growth ’18 and ’19 | 21% and 12.4% | 28.6% and 28.2% |
| Dividend yield | 2.1% | 0% |
| 2017 Comp-store sales | 3% | 6.4% |
| 2018/19 valuation | 22.4 times and 20 times | 37.8 times and 29.6 times |
Chipotle stock does have a few things going for it. For one, 2017 comp-store sales growth was superior to SBUX, as is its earnings growth this year and next. But it should be noted that SBUX has continually churned out record year after record year of earnings and before it ran into retail headwinds, it had put together years of 5% or higher comp-store sales growth.
For Chipotle, it suffered massive losses to both comp-store sales and earnings thanks to its food-illness outbreak. As business inches back, sales and earnings are able to show more robust growth than SBUX in the short-term.
It should be noted that this growth comes at a price. Based on 2018 earnings estimates, SBUX stock is 40% cheaper than Chipotle and it’s ~33% cheaper based on 2019 estimates. It also buys back a lot of stock, yields more than 2% and is very committed to raising its dividend. For instance, in October management approved a 20% dividend increase. It’s one reason I consider Starbucks a Future Blue Chip stock.
Also worth noting, while CMG should have faster earnings growth, SBUX has better revenue growth.
While Starbucks and Chipotle are both opening stores in the U.S., Starbucks is seeing unprecedented growth in China. Last quarter, net revenue in China jumped 30%, while comp-store sales clocked in at 6%. At this rate, the company plans to continue opening 500 stores annually for several years.
Trading Chipotle Stock
This sounds like some anti-Chipotle rhetoric, huh? That’s not the case. CMG stock could have some major upside if Niccol is able to implement serious change. It’s got solid growth right now and, short of a food-illness issue, shares should have upside.
On the five-year weekly chart, we can see potential resistance around $350 and a nasty downtrend around $400. I expect this downtrend to give CMG stock trouble at some point. Above that though, and Chipotle stock becomes much more attractive. While not pictured because we’re using a weekly chart, the 50-day moving average could soon cross above the 200-day, creating what’s known as a “golden cross.” That too would be bullish.
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In a nutshell, Chipotle has good growth potential behind Niccol’s new leadership. But the stock isn’t cheap based on near-term earnings and its business is not as lucrative as SBUX at this time. If Chipotle gets its act together, though, I agree that CMG stock has more upside than SBUX in the next 6 to 24 months.
That said, if I were to only buy one stock based on today’s facts, it would be Starbucks.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long SBUX.
