If you’re trying to decide between investment in Chipotle Mexican Grill (NYSE: CMG) or Shake Shack (NYSE: SHAK) the results may be the only information you need. On the one hand, we have another name in hamburgers trying to reinvent the wheel and having a hard time with it while on the other, a fresh approach to simple food that offers consumers choice, flavor, and value, and the difference is seen in the results. Shake Shack just released its Q2 earnings report and it paints a much different picture than the one given by Chipotle Mexican Grill. The burger chain is showing top-line weakness and elusive profitability while the other is growing the top and bottom lines and guiding the market higher.
Chipotle Mexican Grill Sizzles While Shake Shack Fizzles
To be fair, Chipotle Mexican Grill and Shake Shack are different-sized companies in different phases of their growth but there is still something to be said of the comparison. Shake Shack should be sustaining its high levels of revenue growth or even accelerating and not decelerating and missing the consensus as it did in Q2. In a different situation, the 23% YOY growth posted by Shake Shack is good news but it does not support the 316X(forward) earnings multiple and the hard times are not over.
Assuming Shake Shack’s revenue improves over the next quarter, inflation is still high and offsetting the advance. Sales are up 23.2% this quarter but food inflation and labor costs are up 30% each and there is no real sign inflation is slowing. The bottom line results were slightly higher than expected but still resulted in no profits. The company may have to lean into higher prices to offset the advance in costs and that could cut into traffic and offset the impact of a rising store count.
Meanwhile, Chipotle was able to leverage its brand and eCommerce channels to drive top and bottom line outperformance. More importantly, it is sustaining double-digit comps equal to Shake Shack and widening its margins as well. Chipotle reported a 230 basis point improvement in the operating margin that has its profits on the rise, outpacing revenue growth, and at record levels. As for the value, Chipotle trades at a high 48X earnings multiple but it has earnings, cash flow is robust, pricing power is present, and continued growth is in the outlook.
"We are pleased with our second quarter performance during a period of inflation and consumer uncertainty," said Chipotle Mexican Grill CEO Brian Niccol. "Our pricing power and value proposition remain strong as our culinary and food with integrity commitment continues to be a key point of differentiation."
The Analysts Like Chipotle Mexican Grill Better
The analyst sentiment is clearly tilted in favor of Chipotle Mexican Grill. It’s still early for Shake Shack updates but that may not matter, the current consensus rating is a Hold compared to Chipotle’s Moderate Buy and Shake Shack sentiment is slipping while Chipotle’s sentiment is firming. As for the price targets, the analysts see about 44% upside in Shake Shack but this target is trending lower in all the 12, 3, and 1-month comparisons and will likely fall further now the results are out. Chipotle’s price target implies a more modest 15% of upside but that target is firming and edging higher after an analyst reboot earlier in the year.
The Technical Outlook: Chipotle Mexican Grill Is Outperforming
Both stocks have had a decent rebound from the pandemic low but Chipotle Mexican Grill is clearly outperforming. This stock is up nearly 200% since spring 2020 while Shake Shak is up only 45%. Assuming the two companies will continue to perform as they have been, relative to each other, the odds are high that Chipotle Mexican Grill will continue to outperform for the foreseeable future.
Chipotle Mexican Grill is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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