Does Chipotle’s Rally Make It A Better Bet Than Starbucks?

Chipotle Mexican Grill’s stock (NYSE: CMG) has grown 300% since the end of 2017, while Starbucks’ stock (NASDAQ:SBUX) has grown by 38%. This, despite the fact that Starbucks has better profit margins and geographical reach than Chipotle. Does that make sense? We don’t think it does and believe that Starbucks is a better investment currently. Our dashboard Chipotle vs. Starbucks: Does The Stock Price Movement Make Sense? has the underlying numbers.

Starbucks’ revenues have a greater base and have grown by 18% from $22.4 billion in FY 2017 to $26.5 billion in FY 2019 (FY ends in September). This compares to a 25% rise in Chipotle’s revenue from $4.5 billion in 2017 to $5.6 billion in 2019. Starbucks’ profit margin is largely steady and was recorded at about 14% in FY 2019 (The increment in margin seen in 2018 was due to one-time gain resulting from acquisition of a joint venture). Meanwhile, Chiptole’s margin has been fluctuating over the last few years and was recorded at about 6% in 2019.

Additionally, the P/E multiple of Chipotle has seen a sudden growth in recent months and is at 93x currently and has run out of room to grow. Meanwhile, Starbucks’ P/E multiple has been comparatively stable over the years from 27x in 2017 to 29x in 2019. It has fallen to 26x currently due to the uncertainty of Covid-19.

How Do The Core Businesses For Chipotle And Starbucks Compare?

Let’s look at the core business prospects a bit more closely. Chipotle started out as a place that serves food fast, but doesn’t have a typical “fast-food” experience. The company has seen a steady improvement in revenues and margins post the 2016 E. coli crisis. The company has been affected by the coronavirus outbreak, as most restaurants – especially in the US – worked on take-out-only mode for a large period of Q2 2020. However, the company does benefit to an extent from its digital initiatives as Digital sales accounted for 60% of Total sales in Q2 2020. The company had 2.7K restaurants at the end June 2020 with more than 98% in the US.

Starbucks sells a variety of coffee and tea products under the flagship Starbucks Coffee brand. The company has seen a good improvement in its revenues over the past few years while its profit margins have remained steady. It has been affected by the coronavirus outbreak, as most restaurants – especially in the US – were confined to take-out-only mode for a large period of Q2 2020. Starbucks also benefits from its geographical diversification with more than 32K restaurants across 83 markets at the end of June 2020.

While Starbucks seems to be a better bet compared to Chipotle due to better diversification, bigger revenue base, and better profit margins, still want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.

For greater insight in to the Food & Beverages space, check how Dunkin’ Brands is placed to weather a Covid-19 recession.

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