Warren Buffett is certainly familiar with the restaurant industry. Berkshire Hathaway, the conglomerate he has been running for decades, owns Dairy Queen. And it has previously owned Restaurant Brands International.
I think the Oracle of Omaha likes the durability of these businesses. After all, people will always need to eat. What's more, the favorable locations of restaurants introduce another competitive advantage.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. See the 10 stocks »
That's why I believe there are three reasons Chipotle Mexican Grill (NYSE: CMG) is a company Buffett should consider buying. There's also one important factor that that would probably cause him to regret making that decision right now.
Brand
If you look at Berkshire's top stock holdings, like Apple, Coca-Cola, and American Express, you'll notice that Buffett appreciates businesses with strong brand recognition. Chipotle might not be on par with these names, but it has definitely developed a leading brand in the restaurant industry.
According to Piper Sandler's Taking Stock With Teens fall 2024 survey, Chipotle is the third-most-popular restaurant chain among nearly 14,000 U.S. teenagers. Working with social media influencers helps drive brand visibility.
Chipotle's success as a fast-casual pioneer has resulted in other restaurants copying the same model. For example, referencing a chain as the "Chipotle of Mediterranean food" or as the "Chipotle of Asian food" are clear signs of brand power.
Customers
Buffett wants to own companies that prioritize taking care of the needs of their customers. In Chipotle's case, it's not only about providing high-quality food at a great value, but also about reducing friction and driving deeper connections.
Here's where the company's digital investments come into play. Chipotle launched its rewards program in March 2019, and it has already amassed 40 million accounts (according to data from early last year). This provides a channel to engage with consumers by introducing offers or marketing new menu items. Plus, it gives management valuable data.
Chipotle is also building out drive-thru locations at a rapid clip. Of the roughly 330 stores the company plans to open in 2025, more than 80% will come equipped with so-called Chipotlanes. The business demonstrates a focus on catering to its hungry customers, allowing them to order their favorite menu items in ways that are most convenient for them.
Pricing power
Buffett has previously said that one of the top qualities he looks for is the ability to raise prices. You might not believe a restaurant enterprise falls into this category.
However, Chipotle has exhibited pricing power. Over the past few years, the business has had to deal with higher food and packaging costs due to inflationary pressures. Executives increased menu prices on numerous occasions to offset rising expenses.
Despite asking customers to pay more, Chipotle continues to report impressive financial performance. Average annual sales per store of $3.2 million in Q3 2024 was 48% higher than in the same period five years ago. And the operating margin steadily expands, showcasing the benefit that pricing power can have.
Red flag
It's not hard to believe that Chipotle would catch Buffett's eye based on its brand, customer focus, and pricing power. But there's one major red flag that would likely cause him to hesitate.
Buffett is a value investor, as he always seeks to have a margin of safety before buying a company. As of this writing, Chipotle stock trades at a price-to-earnings ratio of 53.7. Even for a high-quality enterprise that has grown earnings at a strong pace, that's a steep multiple to pay.
Chipotle is a wonderful business that should be on your radar. Just wait until the valuation drops before you think about buying shares.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $311,343!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,694!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $526,758!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of January 27, 2025
American Express is an advertising partner of Motley Fool Money. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple and Chipotle Mexican Grill. The Motley Fool recommends Restaurant Brands International and recommends the following options: short March 2025 $58 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
