Is Chipotle Stock A Better Pick Over Yum! Brands?

We believe that Chipotle Mexican Grill stock (NYSE: CMG) is a better pick than its industry peer – Yum! Brands (NYSE: YUM). CMG stock trades at a higher multiple of 8x sales, versus over 5x revenues for YUM. This can be attributed to CMG’s superior revenue growth, profitability, and financial position. There is more to the comparison, and in the sections below, we discuss why we think CMG will outperform YUM in the next three years. This analysis compares several factors, such as historical revenue growth, returns, and valuation. Our dashboard Chipotle vs Yum! Brands: Industry Peers: Which Stock Is A Better Bet? has more details on this.

1. CMG Stock Has Fared Better In The Last Three Years

The overall performance in CMG stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the CMG stock were 26% in 2021, -21% in 2022, and 65% in 2023. On the contrary, the annual returns were less volatile for YUM stock than the S&P 500. Returns for the YUM stock were 30% in 2021, -6% in 2022, and 4% in 2023.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CMG face a similar situation as it did in 2021 and 2022 and YUM face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

2. CMG Has Seen Better Revenue Growth

Chipotle has seen its sales rise at an average annual rate of 14.4% from around $7.6 billion in 2021 to $9.9 billion in 2023, while Yum! Brands’ sales grew at an average rate of 3.7% from $6.6 billion to $7.1 billion in 2023 over the same period. In comparison to this year’s performance so far, CMG’s revenues grew 15% in the first three quarters of 2024 to $8.5 billion, whereas YUM’s revenues grew 3% y-o-y to $5.2 billion during the same period.

Chipotle’s Revenues have increased steadily over the years, driven by menu innovation, price increases, and good execution of the company’s digital strategies. While the company’s revenue growth is slowing, it is still holding up well – as it has successfully passed on higher costs to customers by raising menu prices. The popular Tex-Mex chain’s Q3 2024 top line grew 13% year-over-year (y-o-y) to $2.8 billion. Also, CMG’s comp-store sales rose 7% in Q1, 11% in Q2, and 6% in Q3 – suggesting that it is maintaining growth in a sluggish economy. For the full year, Chipotle reiterated its outlook that same-store sales will grow by a mid to high-single-digit percentage. The company owned and operated 3,371 Chipotle restaurants throughout the U.S. and 66 international Chipotle restaurants in 2023 – specializing in serving Mexican cuisine.

Yum! Brands operates over 60,000 restaurants in more than 155 countries through its key brands: KFC, Taco Bell, Pizza Hut, and the Habit Burger Grill. The company emphasizes a franchise-based business model, which enables rapid expansion while minimizing direct operational risks. Approximately 98% of its restaurants are franchised, which contributes to a sustainable growth strategy. Yum! Brands revenue has been driven by digital sales and international expansion in key brands like Taco Bell and KFC, while challenges persisted, especially in Pizza Hut’s performance negatively impacted by geopolitical issues.

3. CMG Is More Profitable

Chipotle’s operating margin of 15.8% in 2023 grew from 10.7% in 2021, and the metric stood at 17.7% for the nine months of FY 2024. Yum! Brands’ operating margin expanded slightly from 32.5% to 32.8% over this period. Over the nine months of FY 2024, this metric stood at 33.7%. Looking at the last twelve-month margin change compared to the last 3 years operating margin, Chipotle’s 2.1% fares better than 0.4% for Yum! Brands.

Looking at financial risk, Yum! Brands fares better than Chipotle, with its 28.7% debt as a percentage of equity being lower than 120% for the latter. However, CMG’s 15% cash as a percentage of assets is higher than 9% for Yum! Brands, implying that Yum! Brands has a better debt position and less cash cushion.

4. The Net of It All

We see that Chipotle has demonstrated better revenue growth, is more profitable, and has a better cash position. On the other hand, Yum! Brands has a better debt position. Using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CMG is currently the better choice of the two. The table below summarizes our revenue and return expectations for CMG and YUM over the next three years, and points to an expected return of 33% for CMG over this period vs. a 12% expected return for YUM. We estimate Chipotle’s Valuation to be $61 per share based on a 54x P/E multiple and expected earnings of $1.12 on a per-share and adjusted basis for the full year 2024.  We believe Chipotle’s business is worthy of such a premium multiple based on its remarkable store economics, growing restaurant-level operating margin, and increased benefit from its Rewards Program.

While CMG may outperform YUM in the next three years, it is helpful to see how Chipotle’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/11/2024
[2] Cumulative total returns since the end of 2016

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