CMG: Chipotle vs. EI Pollo Loco: Which Stock is a Better Buy?

Chipotle Mexican Grill, Inc. (CMG) and El Pollo Loco Holdings, Inc. (LOCO) are two of the world’s leading restaurant chains that serve primarily Mexican-style food. Operating through roughly 2,700 restaurants, CMG is well-known for its tacos and burritos. LOCO, which operates in the limited-service restaurant (LSR) segment, specializes in fire-grilling citrus-marinated chicken.

While the restaurant industry was hit severely by the pandemic, many companies are recovering quickly based on their efforts to serve their customers remotely. CMG and LOCO have been witnessing significant increases in their revenues, due particularly to increased digital sales.

While CMG has returned 189% over the past five years, LOCO has gained 43.3%. In terms of past-year performance, CMG is a clear winner with 65.7% returns versus LOCO’s 19.6%. But which of these two stocks is a better pick now? Let’s find out.

Latest Movements

In November, CMG started testing Smoked Brisket at 64 restaurants throughout Cincinnati and part of Sacramento, California. The company announced that the Brisket will be available for in-restaurant, online, mobile, and contactless delivery orders at participating locations for a limited time.

The company announced on November 17, that it is launching Chipotle Royalty with David Dobrik. Competitors will have to prove why their Chipotle order is the best among others. Three winners will get $10,000 in cash, and will have their go-to bowl, burrito, salad or taco order featured as an official menu item on the Chipotle app and Chipotle.com for a limited time. Stephen J. Wampler Foundation’s founder Steve Wampler’s son Joe won $10,00 for the Wampler Foundation through the contest.

Also in November, CMG opened its first-ever Chipotle digital-only restaurant called the Chipotle Digital Kitchen. It is located in Highland Falls, New York. The new prototype allows the company to enter more urban areas that would not support a full-size restaurant.

In December, LOCO announced the return of its fan favorite Pollo Fit Bowls with a delicious twist. Because people are spending more time at home and indulging in unhealthy foods, the company brought back Pollo Fit Bowls to help patrons start the new year with healthier eating habits. The new lineup available system-wide includes double protein avocado pollo fit bowl, double protein fajita pollo fit bowl, and double protein Mexican Caesar pollo fit bowl.

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To celebrate its 40^th anniversary, in December LOCO introduced a special edition e-gift card offer, which was designed to include the company’s bright and retro logo from forty years ago and imagery from the first El Pollo Loco restaurant. On December 2, LOCO unveiled a new L.A. Mex restaurant design with enhanced off-premises convenience and digital footprint. The company, in partnership with Postmates, continued its free delivery offer through the end of the last year.

Recent Financial Results

CMG’s revenue has surged 14.1% year-over-year to $1.6 billion for the third quarter ended September 30, 2020, driven primarily by growth in digital sales, which tripled year-over-year. Digital sales accounted for 48.8% of total sales and increased 202.5% year-over-year. Comparable restaurant sales increased 8.3% year-over-year. Net income of $80.2 million increased significantly from the second quarter. EPS of $3.76 surpassed the Street estimate by 8.4%.

LOCO’s revenue for the third quarter ended September 30, 2020 increased 11.4% sequentially to $111 million. System-wide comparable restaurant sales increased 1.8% year-over-year. And net income increased 55% year-over-year to $9.9 million, yielding EPS of $0.28,which increased 55.6% year-over-year.

Past and Expected Financial Performance

CMG’s revenue and EPS have grown at a CAGR of 9.8% and 17.7%, respectively, over the past three years.

The market expects the company’s revenue to increase 11.7% for the fourth quarter ended December 31, 2020, 15.6% for the quarter ending March 31, 2021, and 17% in 2021. CMG’ EPS is expected to grow 31.1% for the quarter ended December 31, 2020, and 94% in 2021. Moreover, its EPS is expected to grow at a rate of 25.8% per annum over the next five years.

LOCO’s revenue and EPS have grown at a CAGR of 2% and 40.3%, respectively, over the past three years.

The market expects LOCO’s revenue to increase 8.4% for the fourth quarter ended December 31, 2020, 3.5% for the quarter ending March 31, 2021, and 4% in 2021. The company’s EPS is expected to grow 16.7% for the quarter ended December 31, 2020, and 1.2% in 2021. Moreover, LOCO’s EPS is expected to grow at a rate of 15% per annum over the next five years.

Thus, CMG has an edge over LOCO here.

Profitability

CMG’s trailing-12-month revenue of $5.82 billion is much more than LOCO’s $423.29 million. Moreover, CMG is more profitable with a gross margin of 33.7% versus LOCO’s 22.1%.

Also, CMG’s leverage free cash flow margin of 7.3% compares favorably with LOCO’s 4.6%.

Valuation

In terms of forward P/E, CMG is currently trading at 126.16x, much more expensive than LOCO which is currently trading at 21.81x. Moreover, CMG is more expensive both in terms of trailing-12-month P/S (6.64x versus LOCO’s 1.49x), and forward PEG (6.03x versus LOCO’s 2.18x).

In terms of trailing-12-month price-to-book, CMG’s 21.49x is much higher than LOCO’s 2.43x.

Though CMG looks much more expensive compared to LOCO, it is worth paying this premium considering CMG’s significantly higher earnings growth potential.

POWR Ratings

While CMG is rated “Strong Buy” in our proprietary POWR Ratings system, LOCO is rated “Buy.” Here are how the four components of our overall POWR Rating are graded for CMG and LOCO:

CMG has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #3 of 50 stocks in the Restaurants industry.

LOCO holds an “A” for Trade Grade, and Industry Rank, and a “B” for Buy & Hold Grade, and Peer Grade. It is currently ranked #21 in the same industry.

The Winner

Both CMG and LOCO are good investment bets considering their market dominance and continued expansion on the digital front. However, CMG appears to be a better buy despite trading at a marginally higher valuation based on its higher revenue and earnings growth potential.

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CMG shares were trading at $1,333.04 per share on Monday morning, down $53.67 (-3.87%). Year-to-date, CMG has declined -3.87%, versus a -1.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...