The restaurant sector is definitely one of the most competitive markets around. However, there are some businesses that have been able to stand out from the crowd. This can provide investors with potential ideas to consider.
Two top names in the industry that are probably already on your radar are Chipotle Mexican Grill (NYSE: CMG) and Starbucks (NASDAQ: SBUX). While one is thriving and the other is dealing with some issues, they both possess strong investment merits.
Which of these leading restaurant stocks is the better investment right now?
The booming Tex-Mex chain
For starters, Chipotle's resilience during a time of disruptive developments is a must-know reason to consider buying the stock. In the past four and a half years, we've had a global pandemic, supply chain issues, inflationary pressures, and rising interest rates. All these challenges made things difficult for businesses.
But during this volatile period, this company posted strong revenue and earnings growth, not missing a beat. As the Federal Reserve starts to embark on a more favorable monetary path, it's difficult to envision a near-term scenario in which Chipotle doesn't continue to thrive. This should give investors peace of mind.
Chipotle has been able to increase its top line at a double-digit pace like clockwork. But it's still staring at a major growth opportunity, which is another reason to like the stock.
There are currently 3,530 Chipotle locations. However, executives believe the figure, particularly in North America, can one day get to 7,000. Expanding the physical footprint, coupled with steadily increasing store-level annual sales volume, means that over the long term, Chipotle's revenue potential is significantly greater than the current level.
It's also hard to ignore the company's outstanding profitability. Chipotle's operating margin went from 17.2% in second-quarter 2023 to 19.7% in the latest quarter, driven by expense leverage and proven pricing power. It's easy to believe that as the sales base continues to expand, the business will see its bottom line increase.
The Wall Street analyst community believes that Chipotle's earnings per share will soar 19.9% between 2023 and 2026. That profit potential can also attract investors.
The struggling coffeehouse giant
Starbucks hasn't been performing as well as Chipotle. The coffee chain's sales have dipped in the past two fiscal quarters. Here's where the new CEO, Brian Niccol, can make a positive difference. Credited with turning Chipotle around following its health scare several years ago, he is focused on improving Starbucks' operations in the U.S., where transactions were down 6% last quarter. Furthermore, he believes in just how powerful the brand is.
It's important to invest in companies that have a top CEO at the helm. Starbucks now has one of the best leaders in the restaurant industry working to improve its situation. This is another reason to consider owning the stock.
Investors might be discouraged by Starbucks' current situation, as it has clearly hit a rough patch. But this is precisely what creates the opportunity for prospective investors. Chipotle might be firing on all cylinders, but expectations remain elevated.
The Tex-Mex chain's stock trades at a nosebleed price-to-earnings (P/E) ratio of 57. In my mind, buying the business today does not look like a prudent move, as a high valuation reduces the margin of safety and creates a headwind to achieving adequate returns.
On the other hand, with Starbucks shares trading 24% off their all-time high, a milestone that was reached in July 2021, they can be bought for a more reasonable P/E multiple of 27. Given the fact that the company's profits have been taking a hit in recent quarters, the current P/E ratio is artificially high right now. As Starbucks hopefully returns to growth and fixes its financial position sooner rather than later, the valuation will look more compelling.
There's no question that Chipotle looks like the better business. But in my view, Starbucks is the better stock to buy of the two.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Best Stock to Buy Right Now: Chipotle vs. Starbucks was originally published by The Motley Fool