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Founded in 1993, Chipotle Mexican Grill, Inc. (CMG) operates fast-casual and fresh restaurants. CMG categorizes its restaurants as endcaps, in-lines, free-standing or other, and serves a menu of burritos, tacos, burrito bowls, and salads. As of December 31, 2020, it operated 2,724 Chipotle restaurants in the United States, 40 international Chipotle restaurants, and 4 non-Chipotle restaurants.

Shake Shack, Inc. (SHAK) operates as a fast-casual restaurant chain in the United States and internationally. Its menu focuses on food and beverages crafted from a range of classic American foods. As of December 30, 2020, it operated 311 Shacks, including 183 domestic company-operated Shacks, 22 domestic licensed Shacks, and 106 international licensed Shacks.

Fast-casual restaurant operators have strengthened their online presence and added delivery schedules, gift-card sales, and other services on their websites to continue operating amid the pandemic, making them the most resilient segment in the restaurant industry. Delivery services witnessed increased net sales during the fourth quarter of 2020. The fast-casual restaurants market in the U.S. is expected to grow at a CAGR of almost 8% over the next four years.

CMG has returned 11.8% year-to-date versus SHAK’s 30% gains. CMG has gained 9.1% over the past month, but SHAK lost 10%. In terms of the past year’s performance, SHAK is a clear winner with 153.3% returns versus CMG’s 89%. But which of these two stocks is a better pick now? Let’s find out.

Latest Movements

According to CMG’s 2020 Sustainability Report, published on April 15, it had achieved a 51% waste diversion rate through recycling, composting, and waste-to-energy programs, reaching a key goal outlined in its 2018 Sustainability Report.

CMG opened a new restaurant in Surrey, BC, Canada on March 30. The company has plans to open seven additional restaurants over the next year and unveil its first Canadian Chipotlane–CMG’s drive-thru digital order pickup lane–in Canada at the next restaurant opening in Port Coquitlam.

On March 25, CMG invested in Nuro, a leader in autonomous delivery vehicles, as part of its Series C funding round. After generating growth in excess of  174% year-over-year in digital business last year, CMG hopes to access Nuro’s autonomous vehicles using robotics in their delivery through this investment.

SHAK opened a restaurant in Santa Monica, California on April 18. It also opened its new restaurant in the Cedar Hills location on April 16, which is Oregon’s first SHAK restaurant. SHAK plans to introduce a new pilot program in its restaurants. It will provide Restore Foodware’s AirCarbon cutlery and straws to reduce waste and work toward a more sustainable world and food industry at-large.

After opening a restaurant in Singapore and Beijing during the pandemic last year, on April 15, SHAK  announced plans to expand its business to Asia. Its restaurants in Shenzhen, Guangzhou, and Macao are set to open in the coming months. The company plans to open 35-40 new locations globally in fiscal 2021.

SHAK has partnered with Pinky Cole’s in-demand plant-based Slutty Vegan restaurant brand to create a limited-edition 100% vegan burger. The TheSluttyShack vegan burger debuted at SHAK’s Atlanta restaurant on April 11. The partnership marks the newest offering from SHAK’s “Now Serving” series, for which it is collaborating with local chefs across America to give back and support local organizations and to create unique and delicious menu items.

Recent Financial Results

CMG is scheduled to release its fiscal 2021 first-quarter results on April 21, 2021, after the market closes. CMG’s revenue for the fourth quarter, ended December 31, 2020, increased 11.6% year-over-year to $1.61 billion. Its revenue from its delivery service segment was  $20.81 million, up 170.6% year-over-year. Its income from operations had decreased 34.6% year-over-year to $290.16 million. However, CMG’s adjusted net income came in at $99.33 million for the quarter, which represents an improvement of 22.6% year-over-year. Its adjusted EPS also increased 21.7% from the prior-year period to $3.48.

As of December 31, 2020, CMG’s total assets have increased 17.2% year-over-year to $5.98 billion and had cash and cash equivalents of $635.84 million.

SHAK is scheduled to release its fiscal 2021 first-quarter results on May 6, 2021, after the market closes. For the fourth quarter ended December 30, 2020, SHAK’s total revenue rose more than 4% year-over-year to $157.51 million. SHAK’s operating loss came in at $12.22 million for the quarter, compared to an operating income of $488,000 in the fourth quarter of 2019. Its net loss increased 828.2% year-over-year to $19.43 million. And its loss per share came in at $0.50 for the quarter, up 733.3% from the prior-year period.

As of December 30, 2020, SHAK’s total assets increased 18.3% year-over-year to $1.15 billion and the company had cash and cash equivalents of $146.87 million.

Past and Expected Financial Performance

CMG’s revenue and total assets grew at CAGRs of 10.2% and 43%, respectively, over the past three years. The CAGR of the company’s EBITDA has been 8.1% over the past three years.

Analysts expect CMG’s revenue to increase 37.7% in the current quarter (ending June 30, 2021), 21.7% in the current year, and 12.6% next year. Its EPS is expected to grow 1440% in the current quarter, 120.1% in the current year, and 31.8% next year. CMG’s EPS is expected to grow at a rate of 52.8% per annum over the next five years.

In comparison, SHAK’s revenue and total assets grew at CAGRs of 13.4% and 34.5%, respectively, over the past three years. The CAGR of the company’s EBITDA has been negative over the past three years.

Analysts expect SHAK’s revenue to increase 95.2% in the current quarter (ending June 30, 2021), 41.3% in the current year, and 28% next year. However, its EPS is expected to increase 111.1% in the current quarter, 112.5% in the current year, and 714.3% next year. Unfortunately, its EPS is expected to decline at a rate of 6.1% per annum over the next five years.

Profitability

CMG’s trailing-12-month revenue is 11.4 times SHAK’s. CMG is also more profitable, with a gross profit margin of 34.6% versus SHAK’s 30.8%.

However, CMG’s ROE of 19.2% and ROA of 3.7% compare favorably with SHAK’s negative values.

Valuation

In terms of forward non-GAAP P/E, SHAK is currently trading at 2632.50x, 3892.9% higher than CMG, which is currently trading at 65.93x. Also, in terms of forward non-GAAP PEG, SHAK’s 131.62x is 4013.1% higher than CMG’s 3.20x. Also, CMG’s forward EV/EBITDA of 39.77x is significantly lower than SHAK’s 62.50x.

Thus, CMG looks more affordable here.

POWR Ratings

While SHAK has an overall D rating, which translates to Sell in our proprietary POWR Ratings system, CMG has an overall B rating, which equates to a Buy.

Both CMG and SHAK have a Momentum Grade of C, due to their mixed price performance. However, in terms of Value Grade, CMG has been graded a C, given its marginally higher valuation compared to its peers. In comparison, SHAK’s Value Grade of D signifies its overvaluation.

Also, compared to a Growth grade of B for CMG, SHAK’s Growth grade of D indicates limited growth potential.

Of 46 stocks in the B-rated Restaurants industry, CMG is ranked #19, while SHAK is ranked #43.

Beyond what we’ve stated above, our POWR Ratings system has also rated both CMG and SHAK for Sentiment, Stability, and Quality. Get all CMG ratings here. Also, click here to see the additional POWR Ratings for SHAK.

The Winner

Both CMG and SHAK are well-known fast-casual restaurants in the United States. They both have put effort into waste diversion methods and sustainability. However, CMG seems to be a better buy based on its higher earnings growth potential and lower valuation.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Restaurant industry.

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CMG shares were trading at $1,528.82 per share on Tuesday afternoon, down $21.19 (-1.37%). Year-to-date, CMG has gained 10.25%, versus a 10.67% rise in the benchmark S&P 500 index during the same period.