This Fast-Food Stock Is Eating Chipotle’s Lunch

Fast-casual restaurant chain Chipotle Mexican Grill (NYSE: CMG) was, until recently, one of the market’s darling growth stocks. The stock is up 210% in the past five years, while the S&P 500 index is up 75% in the same time.
Chipotle enjoyed rapid sales and earnings growth over the past several years, as its Mexican fare has been a hit with U.S. consumers. But its momentum has significantly slowed down this year. The stock fell 6% after reporting weak quarterly earnings on Oct. 21, and is now in the red for the year.
Meanwhile, one of Chipotle’s fiercest competitors, Jack in the Box (NASDAQ: JACK), is quickly gaining ground. Jack in the Box operates its namesake burger chain as well as Qdoba, which competes directly with Chipotle.
Thanks largely to huge growth at Qdoba, Jack in the Box is growing at higher rates than Chipotle, trades at a more modest valuation, and even offers investors a dividend.

Chipotle Losing Its Spice

Last quarter, Chipotle earned $4.59 per share on $1.2 billion of revenue. Revenue and earnings per share increased 12% and 10%, respectively, year-over-year.
These results hardly look like cause for concern. With the economy sputtering along this year, most companies would love to realize double-digit sales and earnings growth. But there are reasons why Chipotle’s investors were not satisfied.
First, Chipotle is a premier growth stock. Its investors are used to not just high growth, but accelerating growth. And the company did not deliver on that front. Last quarter, Chipotle grew comparable sales – a key metric for restaurants that analyzes sales growth at locations open at least one year – by just 2%.
One reason for the decelerating growth was the carnitas shortage that arose when a Chipotle supplier violated its humane animal treatment policy. The problem has been resolved, but it will take time for all restaurants to fully restore their carnitas inventories.
Another reason for the slowdown could simply be that Chipotle is not a novel concept anymore, and perhaps it is nearing its inevitable peak.
Consider that in the same quarter last year, Chipotle grew revenue and earnings by 31% and 56%, respectively, thanks largely to 20% growth in comparable sales.
Second, as a high-flying growth stock, Chipotle trades at a very rich valuation. Even after its post-earnings decline, the stock still trades for 40 times trailing earnings and 32 times forward earnings estimates. Analysts are forecasting that Chipotle earnings will grow 18% next year, but considering the slowdown this year, the company may have trouble meeting those expectations.
Meanwhile, Jack in the Box is firing on all cylinders. Its Qdoba banner grew comparable sales by 10% over the first three fiscal quarters, year-over-year. In the same time, the Jack in the Box restaurants grew comparable sales by 6%. This led to 24% operating EPS growth over the first nine months – a far better result than Chipotle.
In addition, Jack in the Box stock trades for a more reasonable 28 times trailing earnings and 20 times forward earnings.

Dividend Is an Added Kicker

Lastly, income investors will likely view Jack in the Box as a better stock than Chipotle, because Jack pays a 1.6% dividend, while Chipotle does not offer a dividend payout. Moreover, Jack in the Box is an excellent dividend growth stock, having increased its dividend by 50% this year.
While Jack in the Box’s current 1.6% yield looks tiny, that yield could meaningfully grow over time. If the company raises its dividend by 25% – which could be an overly conservative estimate given its historical earnings and dividend growth – the stock would provide a 4.5% yield on cost in five years.
(Click here for more stocks that consistently reward shareholders with dividend hikes.)
While Chipotle’s comparable sales and earnings growth trajectory has declined significantly this year, Jack in the Box is growing at much higher rates. Jack a cheaper stock than Chipotle, is growing faster, and even pays a dividend.
As a result, Jack in the Box may be a better fast-food stock alternative to Chipotle for growth, value and income investors alike.