Chipotle Stock Is Tanking. What to Think About Before Buying.

At first blush, the reason seems obvious. McDonald’s delivered a top- and bottom-line beat with same-store sales running ahead of expectations. By contrast, Chipotle’s revenue came in a bit light, while its same-store sales also just missed consensus estimates.

McDonald’s international business put in a strong showing in the quarter, while Chipotle—with its limited presence abroad—wasn’t able to capture as much of what it noted as strong demand from tourists. Likewise, ongoing inflationary pressures seemed to weigh more on Chipotle than McDonald’s.

Chipotle had less wiggle room, as well. The company delivered a great first quarter in April, and the shares are up more than 37% this year. That’s well ahead of the S&P 500’s performance and more than double the gain for McDonald’s—leaving Chipotle shares with a forward price-to-earnings ratio well north of 40 times.

McDonald’s spring quarter included management caution, and the stock’s more modest run means it changes hands for less than 25 times forward earnings.

There’s no doubt that bulls have been left somewhat disappointed by Chipotle’s quarter. Still, there may be a reason for investors to buy the stock on the dip.

First, the shares have undeniably been a long-term winner, soaring more than 300% over the past five years, compared with 88% and 63% for McDonald’s and the S&P 500. Chipotle is no stranger to volatility around earnings—the stock dropped nearly 7% after its third-quarter results in October as the market fretted about its price hikes—only to recover.  

Then there’s the fact that while McDonald’s stock is trading just a hair above its five-year average, Chipotle’s valuation, below 42 times, is at a discount to its historical level of roughly 50 times. Analysts peg Chipotle’s long-term earnings growth rate at 27%, versus less than 9% for McDonald’s.

Even as analysts take down their full-year estimates on the heels of Chipotle’s report, that company is still expected to deliver earnings per share growth of more than 33% on a nearly 14% rise in revenue. That would outpace expectations for McDonald’s for top- and bottom-line growth of 8.4% and 10.5%, respectively, this year.

Chipotle has demonstrated pricing power that it can use to offset ongoing higher costs—those worrisome October menu price increases bore fruit in subsequent quarters. Nor is McDonald’s the only beneficiary of the tradedown effect, as value-conscious consumers keep a keen eye on their budgets.

Chipotle tends to cater to slightly higher-income earners, who are choosing it over pricier sit-down restaurants, whereas McDonald’s noted that order patterns from its lower-income customers show the strain on their spending power.

That’s not to say that the enthusiasm around McDonald’s quarter is misplaced, nor that buying into its strength is foolish. And Chipotle certainly does have to show that its second quarter was more blip than speed bump for its sales and traffic momentum. Investors may want to have a strong stomach.

Nonetheless, betting that the burrito maker is down but not out seems as reasonable as ordering that extra robot-prepared guacamole.

Write to Teresa Rivas at [email protected]