The Top 25 Stocks for the NEXT 25 Years: Chipotle -- the next McDonald's

The next name in my continuing series of Top 25 stocks for the NEXT 25 years is Chipotle Mexican Grill (NYSE: CMG). The opportunity to expand and grow for Chipotle is so large that this company could become the next McDonald's (NYSE: MCD). In fact, one of the first and biggest investors in Chipotle was McDonald's. McDonald's invested in Chipotle in late 1999, enabling the young concept to have the necessary capital to expand its geographic reach beyond its headquarter base of Denver, Colorado.

I have been recommending Chipotle to members of my web site since last September when the stock was trading at $49. The shares are now at $82, representing a market capitalization of $2.6 billion. The company has a store unit base of 600 locations, but the exciting part of the story is that Chipotle is just starting. This company has an extremely loyal following of customers who visit Chipotle on average three times per month. The food is authentic Mexican and it is as fresh as fresh can be. The menu is simple in nature -- burritos, tacos and salads. The pork and chicken served is organically raised and the vegetables and bean are almost totally organic. Simply put: the food is excellent and healthy and the surroundings pleasant and inviting.

As I mentioned, I have been on this stock since $49; why is it still one to accumulate at the $82 level? Chipotle is tapping into the American appetite for freshly prepared Mexican food. With only 600 units in its base, Chipotle has the room to grow the concept by a factor of 15-20 times. The U.S. market alone will easily absorb 10,000-12,000 units before any discussion of saturation creeps in. Chipotle is appealing to all demographic and ethnic tastes. The Mexican population in the United States frequents Chipotle's as the food is similar to home cooking.
McDonald's has a market capitalization of $62 billion or about 30 times the size of Chipotle.This is the model for Chipotle to emulate. Chipotle has a loyal following of customers excited about bringing in new customers, as the dining experience is worthwhile.

Chipotle went public in February 2006 and has exceeded expectations every quarter. My estimates for 2007/2008 for revenues and earnings per share are $1.06 billion and $1.72 and $1.32 billion and $2.20 respectively. Currently the operating margins are in the 7-8% range with huge room to grow. Chipotle is investing in new store openings and advertising, although so much of the business comes from word of mouth. As the concept matures over time the operating margins will be in the 16-19% range.

McDonald's has divested itself from its share holdings in Chipotle. Investors were relieved when McDonald's sold its last remaining shares in late 2006, thus allowing for individual and institutional shareholders to no longer be concerned about McDonald's intentions. McDonald's was purely an investor with no other involvement. Chipotle management did learn quite a bit from McDonald's in terms of supply chain and inventory management.

With the concept gaining national prominence and acceptance, Chipotle can indeed become the next major fast-casual food retailer in the United States and reward its shareholders along the way quite handsomely. The stock has had a huge run up since the IPO and investors may want to nibble away at beginning a position. But keep in mind this company has the chance to be a 30-40 bagger over the next couple of decades.