The Next Chipotle

In 2006, a small Mexican restaurant chain IPO’d at $45 a share. The stock had been offered at $18, but it launched more than 100% higher on its first day as a public company.

At the time, this chain had 500 stores, and annual revenue had just jumped 32% to around $650 million a year. That’s a very strong jump in sales. Investors clearly believed this chain was going to be a winner.

Of course, investors had been excited by innovative restaurant IPOs before…

Boston Chicken — now known as Boston Market — ramped nearly 140% on its IPO day in 1993. Investors thought the idea of a restaurant that featured relatively healthy carryout meals for the family was pretty good. 

They were wrong. Boston Market expanded too fast and never really caught on with consumers. Just five years after that hugely successful IPO, Boston Market filed for bankruptcy protection.

It was bought out of bankruptcy-court protection by McDonald’s two years later.

More recently, we’ve seen a slew of restaurant IPOs. El Pollo Loco (NASDAQ: LOCO) ran from $18.58 to over $40 in its first six days as a public company. But that promising start isn’t look so good now — shares have fallen back to around $21 a share.

And even at that price, the price-to-earnings ratio is above 30. That’s pretty expensive for a company that might grow earnings 20% next year…

Then there was sandwich shop Potbelly (NASDAQ: PBPB). This Chicago-based chain debuted at ~$32 in October of 2013.

Now, I love the Farm House salad from Potbelly. Topped with bacon, chicken, and blue cheese, it’s fantastic. But the chain is not doing well. It’s barely profitable and is struggling to grow earnings.

The shares have fallen from $32 to under $12. And the stock may fall even further, as the price-to-earnings ratio is still above 40. 

Noodles & Company (NASDAQ: NDLS) was another one that was supposed to have a lot of potential. This Colorado-based chain has 410 restaurants and did $385 million in sales over the last year. The stock jumped from $32 to $47 early on, but it, too, is failing to live up to expectations. 

Noodles & Company has missed earnings estimates for four quarters in a row. The stock has fallen from $47 to $25. And like Potbelly, its shares look darned expensive, with a price-to-earnings ratio of nearly 70. 

So what’s the deal here? Why is it so hard to find a successful restaurant investment? 

1,371% Gains

Restaurants can certainly make great investments. McDonald’s (NYSE: MCD) has been one of the great investments over the last 25 years. Revenue has grown, the share price has done well, and the dividend has more than tripled.

And then there’s the Mexican chain I mentioned earlier. Since that 2006 IPO, the company’s shares have launched from $45 to over $650 a share. You probably know by now that I’m talking about Chipotle (NYSE: CMG).

Today, eight years after it went public, Chipotle has tripled the number of its stores to 1,600 stores. It did $4 billion in sales over the last year.  

Chipotle shares are up 1,371%, making it one of the very best investments you could have made over the last eight years. Now, if we can just find another restaurant concept that can do as well as Chipotle…

Chipotle’s formula is pretty basic: The company serves easily accessible food using quality ingredients at a reasonable price. It has hit on an ideal formula.

So I was pretty excited when I found another small, up-and-coming restaurant chain with a similar formula and similar potential…

The Next Chipotle 

Stifel analyst Paul Westra says this “next Chipotle” restaurant is “one of the best­-in­-history up­-and­-coming restaurant concepts… [its] early-stage momentum and store­-level profitability is even outpacing Chipotle’s… early­-stage results.”

That should get your attention…

This company plans to have ~1,500 locations open by 2022 — roughly the same number of stores as Chipotle. If it can simply maintain the average of $1.5 million in annual sales per location, that would mean $2.4 billion in annual sales.

So far, this company has done $160 million in trailing 12­-month revenue. For the full-year 2014, it should do $170 million, and analysts expect $218 million for 2015.

This company currently trades with a price-to-sales (P/S) ratio of 3.5 (that’s $160 million in sales and a $560 million market cap).

For comparison’s sake, Panera has a P/S ratio of 1.75, and Chipotle comes in at 5.25. Traditional fast-food restaurants like McDonald’s and Yum Brands sport P/S multiples of 3.15 and 2.37, respectively.

Obviously, Chipotle is the superstar in this space. Panera’s relatively low P/S multiple reflects the fact that growth has slowed, both in terms of expansion and same­-store sales. So it’s probably reasonable to assign a P/S ratio for “the next Chipotle” that is comparable to McDonald’s (even though we think MCD is overvalued at current prices).

If this “next Chipotle” simply hits its goal of 1,500 restaurants and shows zero same­-store sales growth, a P/S ratio of three would value the company at $6.75 billion — we’re talking about 1,110% growth for the stock over the next seven years!

Now, here’s the thing: I just recommended this stock to my Wealth Advisory subscribers. And while I think this “next Chipotle” restaurant stock is going to be a huge winner, it would be unfair to my paying subscribers to share the name of this investment here.

What I can do is invite you take a test drive of The Wealth Advisory. That way, you can find out more about this stock and our other great investment ideas for yourself. 

Sign up for a test drive of The Wealth Advisory here.

Until next time,

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.