Starbucks Vs Chipotle Stock: Which Is Best?

Chipotle (NYSE:CMG) and Starbucks (NASDAQ:SBUX) are among the most popular food and beverage stocks among investors today.

Both of these companies have large footprints and a high level of popularity with consumers, giving them strong competitive positions.

Interestingly, the former CEO of Chipotle has been hired by Starbucks after growing the market cap of the burrito purveyor from $7 billion to $71 billion. 

So with a new leader at the helm, is Starbucks set to outperform Chipotle? Which stock is best?

Chipotle Is a Growth Machine

Chipotle has been one of the best restaurant growth stories of the last several years. Growing from $3.22 billion of revenue in 2013 to $9.87 billion last year, the Mexican fast-casual restaurant has delivered exceptional revenue results over the last decade.

Even better for investors is the fact that the company still likely has a growth runway ahead of it. Management plans to expand to 7,000 locations over the long run, roughly doubling the current number of stores.

Chipotle’s profitability is also very strong, making it attractive from both a revenue and an earnings perspective.

Over the last 12 months, Chipotle has generated $1.41 billion in net income and delivered a net margin of 13.2%. Net income has consistently grown at year-over-year rates of over 20% since Q1 of 2022, a trend that doesn’t appear to be slowing down yet.

Chipotle’s largest apparent drawback at the moment, however, is its high valuation. Shares of CMG trade at nearly 50x forward earnings, 6.9 times sales and over 20 times book value. For most stocks, these ratios would likely signal substantial overvaluation.

To justify these multiples, Chipotle will have to continue delivering excellent earnings growth. Fortunately, the company appears to be in a decent position to keep growing at a good clip for the foreseeable future.

In addition to continually adding new locations, Chipotle is also still seeing strong same-store sales growth from its existing locations. Comparable sales growth increased 11.1% in Q2, driving overall revenue growth of 18.2%.

In the coming five years, analysts also expect the company’s earnings to keep expanding at a rate of around 22.1% annually.

A final plus for Chipotle is its strong financial position. The company has no long-term debt and a current ratio of 1.7. This suggests that Chipotle has more than enough capital to meet its current obligations while continuing to invest in growth. The company also has a cash reserve of over $800 million, up from about $560 million as recently as a year ago.

Is Starbucks New CEO A Game-Changer?

While Chipotle is still a fast-growing chain, Starbucks is a largely mature company that continues to produce fairly stable earnings on an ongoing basis.

In its last quarterly report, the company detailed a revenue decline of 1% compared to the previous year. While earnings fell 6% compared to the previous year, Starbucks was still able to deliver $0.93 per share in GAAP net income.

Like Chipotle, Starbucks has proven itself to be highly profitable. In the last full fiscal year, the company reported a net margin of 11.2%. Even with revenue growth temporarily stalling out, this margin gives Starbucks a decent cushion. The company also continues to open new stores at a modest pace, having expanded its store count by 3% over the last year.

Though Starbucks still trades at a bit of a premium price, its valuation is nowhere near as high as Chipotle’s. SBUX trades at 26.9x forward earnings and 3.0x sales. These multiples, however, also reflect the company’s lower potential for further growth compared to Chipotle.

Analysts expect Starbucks’ earnings per share to keep growing at a rate of about 9.8% over the next five years. Though certainly respectable, this is far from the kind of growth expected from Chipotle.

As a more mature company, Starbucks pays a dividend rather than reinvesting in aggressive growth the way Chipotle does.

Shares of the coffee giant yield about 2.4% and pay $2.28 annually. This dividend has been growing steadily for 14 years, indicating that management is fairly committed to returning cash to shareholders.

The current dividend payout ratio is a bit over 60%, giving management some room for additional dividend increases. With earnings expected to keep growing at high single-digit rates, it seems likely that Starbucks will be able to maintain its run of dividend growth for the foreseeable future.

Starbucks is also returning cash to shareholders through its ongoing share buyback program. In the three months ending on June 30th, the company bought back about $1.27 billion worth of its own stock. This was almost double the amount it repurchased in the same period a year earlier.

Starbucks has a current ratio of 0.9. While a current ratio below 1.0 is sometimes seen as a warning sign that a company is in a poor position to meet short-term obligations, Starbucks will likely be able to manage its obligations with little difficulty due to its strong cash flows.

Starbucks vs Chipotle Stock: Which Stock Is Best?

Starbucks appears to be the better stock to buy now thanks to the new CEO hire Brian Niccol, who formerly grew Chipotle’s market capitalization from $7 billion to $71 billion.

With that said, both are high-quality businesses that have proven to be sound investments over long periods of time. 

Starbucks likely enjoys a larger moat than Chipotle. While Chipotle has to compete with other fast-casual and fast-food restaurants, Starbucks stands alone as America’s largest coffee chain. The chain serves over 100 million customers each week, about 80% of whom are at least once-a-week Starbucks drinkers.

Chipotle, however, certainly seems to have the edge in its growth trajectory. As an already dominant chain, there may be limited room for Starbucks to reinvest in growth going forward. This fact is, to some degree, reflected in the company’s decision to allocate significant cash to dividends and share buybacks.

Chipotle, however, can continue rapidly building new locations and driving sales growth from its current network to grow its earnings.

Even with its high pricing, Chipotle may be the better bet for risk-seeking investors given it’s likelihood to generate stronger returns for the foreseeable future. Aggressive growth over the coming years seems likely to keep pushing CMG shares higher.

Over the coming 12 months, Chipotle is strongly favored by analysts. The median price target for Chipotle implies an expected upside of 16.4% compared to Starbucks’ 4.6%.

It’s worth noting, though, that Starbucks may well still have its place in conservative investors’ portfolios. While Chipotle may offer higher returns, investors focused on income may appreciate Starbucks’ existing dividend yield and potential for further dividend growth.

Likewise, Starbucks may be safer in the event of an economic downturn. Starbucks is widely seen as recession-proof due to its place as a morning habit for many consumers. Restaurant stocks like Chipotle, meanwhile, may be more susceptible to changes in consumer spending.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.