With a gain of almost 89% entering trade Dec. 30, Chipotle (NYSE:CMG) is my stock of the year.
It’s not just the gain that makes Chipotle stock remarkable. It’s the lessons it holds for InvestorPlace readers. The Chipotle story illustrates two important points: the value of paying attention and the idea that you bet the jockey, not just the horse.
Long-term investors, those who have held Chipotle stock for five years, have seen a gain of just 17%. That’s barely 3% per year. But CEO Brian Niccol, who joined the company in March, 2018, has turned everything around.
Under Niccol, profits have nearly doubled, as has the amount of cash on hand. Free cash flow has jumped 39%, and operating cash flow is up 43%.
As 2020 opens, Chipotle is ready for big things.
What Niccol Has Done
I, and some other journalists, suspected this was coming as soon as Niccol was hired. He had the pedigree, coming to Chipotle from YUM! Brands (NYSE:YUM), where he ran Taco Bell.
His strategy has been to make Chipotle a hipper, fresher version of Taco Bell, with longer hours, an emphasis on delivery and pick-up and an expanded menu.
Niccol’s predecessor, Steve Ells, had built the company around a cafeteria-like lunch line and a short menu of burritos and bowls customers could watch being made. But his fresh-to-order model failed to scale, and a series of food safety issues sent him packing.
Ells was also one of the best-paid executives in the industry, a tradition Niccol has continued with $33.5 million in earnings during 2018. But Niccol has earned his money. Since he took the helm Chipotle shareholders have shared over $10 billion in capital gains. Chipotle is now worth more than Restaurant Brands (NYSE:QSR), which owns Burger King, Tim Hortons and Popeye’s.
What Comes Next?
The big valuation on Chipotle stock is based on hope for what Niccol will do next.
The company is expanding its use of drive-up and walk-up windows, and redesigning restaurants around digital ordering. It is expanding partnerships with delivery companies like Grubhub (NYSE:GRUB), creating what Niccol calls “Chipotlanes,” which could represent 50% of revenue in a few years, up from 20%.
The company is adding a second “make line” to its restaurants for things like quesadillas. Promotions are now all about speedy delivery.
Niccol’s way of doing business does raise red flags. The National Labor Relations Board recently accused the company of firing a worker in New York who tried to start a union. But these seem to be local, minor hiccups. The fact is, Chipotle is selling more food in less space at each restaurant it operates.
Chipotle is now seen as a digital innovator. Under chief marketing officer Chris Brandt, another Taco Bell alum, Chipotle has partnered with “social influencers” on sites like TikTok, targeting “Generation Z,” people born into the new millennium.
The Bottom Line on Chipotle Stock
Chipotle’s gains under Niccol have exceeded its financial performance. But it now has the financial strength to make acquisitions, to expand, and to hang with the “big boys” of its industry. These include companies like YUM!, with a market cap of $31 billion and QSR, with a market cap of $19 billion.
You still need to pay attention. Stocks in the fast food space are highly volatile. As Chipotle has learned, one bad case of diarrhea can ruin your whole year. But Chipotle now has a leader investors trust, and big opportunities before it. Those who paid close attention have been big winners.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
