10/19/2012
By David Urani

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Once again, Chipotle (CMG) is feeling the burden of having a high-growth stock price premium; heck, even after today's 15% plunge it still trades with a 22 P/E ratio. So What's the problem here? Well, Chipotle has been one of the most impressive restaurants in the biz and a worthy favorite of the Street for some time. It missed by $0.03 and now it's becoming a fading star for a couple of major reasons. First of all is the obvious increase in food costs following the US drought that isn't allowing as much leeway in the terms of margins.

But more importantly, the company's comparable store sales are simply slowing. Comps for the quarter of 4.8% aren't too shabby, but not exceptional as is largely expected by investors at this level. But even worse, comp guidance for next year calls for flat to low-single digit growth; hardly a stat deserving of a big momentum stock premium.

McDonald's (MCD) fate wasn't all that different. They posted muted comps (US +1.2%, Europe +1.8% and APMEA +1.4%), while also seeing higher food and labor costs worldwide. Of course McDonald's stock, unlike Chipotle's, is priced for being consistent and stable rather than a momentum growth story so it didn't get hit as hard (-3.9%). Their results weren't all that dissimilar (aside from MCD being a global company while CMG is still mostly domestic) but I find it very interesting to look at the differing strategies between the two.

On one hand you have Chipotle, a trendy hotspot that pushes healthy ingredients and quality, that is cautiously considering a price increase to offset food costs and possibly raise revenue growth. While it's quite possible that they successfully increase sales that way, they do also risk slowing traffic; it could actually backfire if you ask me. Certainly anybody like myself who second guesses coughing up a couple of dollars more for that extra scoop of guac may really reconsider.

On the other side you have McDonald's, who is already pushing their lower priced value items and is looking to drop prices even further. Their mindset is that by leveraging their enormous supply chain and value proposition, they can drive traffic and steal market share.

The way I see it Chipotle may be being forced into a corner by their organic food costs that could see them lose customers to maintain margins. While in the meantime McDonald's is on offense, showing why they are a powerhouse in value dining, hoping to send a message to a hurting customer and to steal market share, even if it means a little pressure on the top line. If you ask me, MCD has more control over its destiny.

David Urani
Wall Street Strategies