Welcome back everyone. We have an exciting busy episode
to get into. I just did three buys, three
buys based off of this busy week.
As we know, entering into this week, I gave you my intrinsic
value estimates of companies that I hold and companies on my
watch list. These were the list of companies
that I was looking at very closely going into earnings
companies that I've studied, I've looked at.
I really like the economics. I really like the business
models as far as what I consider to be good companies.
These are good companies. So the big question is, can I
buy these companies at the right price?
Can I get them on a deal? As an investor that buys
companies based on the future cash flows, I'm always trying to
get those future cash flows at as cheap a price as possible.
And in many cases, the earnings week we went through is a great
opportunity to pick up more shares of companies we've been
looking at, at cheaper prices. So let's go ahead and jump right
in. I did 3 total buys.
Two of them are companies already in this portfolio and
one of them, one of them is a brand new holding.
I'll be going over all three in detail.
Let's go ahead and get started. Number one is in the financial
category. It is my largest holding, my
biggest conviction in My Portfolio which is SMP Global.
I currently have a staggering position size in this company.
This is a lot of money for me, which is almost $68,000 right
now. We currently only have $7000 in
the green because I've only owned this company this year
just year to date. This is one that I just recently
bought into. But I really, really like this
company. When I look on social media and
I look on YouTube and I see the type of stocks that people talk
about, it's not companies like S&P Global S&P Global's left out
of the conversation because they don't sell any flashy product
like a nice Eva, nice car. They don't sell iPhones.
They're not Google, where they have products that you use on a
daily basis, and it's not a company that has a cult
following like Palantir. S&P Global is one of these
companies that seems like it's a little bit boring and more
washed up, but it's not. S&P Global is a globally
dominant tech platform with enormous data sets that's
harnessing the power of a I. It is a diversified company
that's highly monopolistic. They have a credit rating
business where they rate 90% of the global debt in the world.
That is a huge monopolistic position, an enviable position
for this company. They have another massive
segment of their business, which is all data.
This company has more data than most companies could ever dream
of, and they're layering upon that data AI.
They have data of markets, they have data of commodities, They
have data in so many different places that they sell to
customers in SAS subscriptions and usage based models.
This company has an indicee business where they control half
the ETF's that people invest in. They are a globally dominant
player and market and indices offering up more data and more
tools surrounding indices. So they're in an incredibly
enviable position, a wide Moat business with high barriers to
entry that's incredibly capital efficient.
One of my favorite parts about this business is even though
they are a tech company and they are growing quickly and they do
generate enormous amounts of free cash flow, they do it
efficiently. In fact, S&P Global is a more
efficiently ran company than literally all of big tech.
Google, Amazon, Apple, Microsoft, Meta, NVIDIA, Tesla,
none of them come close to the efficiency of SP Global.
They generate billions and billions of dollars of cash flow
while only spending a couple $100 million on stock based
comp. And they spend very little on
CapEx as well. So this company, whenever they
make money, that money goes right back to the investors.
It's not wasted on frivolous projects or overpaid employees.
So let's go ahead and talk about what happened to this company.
Well, S&P Global reported earnings after market closed
yesterday and the stock traded down around 7%.
If I switch to the weekly view here, we can see what happened.
I'm down $4000 this week, which is 5.77%.
Just yesterday it was down 7% and I initiated a buy this
morning that bought another $2000.00 of this stock after it
sold down. Now why did S&P Global sell off?
Well, we can read the headlines, a lot of algorithms and bots and
different traders in the market trade based off of basic top and
bottom line headlines. And in this case, the headline
was that the results were mixed. That's the impression you got
with this earnings result. If you were to just go in and
read any news publication, you would read the S&P Global posted
mixed results. Mixed results aren't good.
It means that there's some good and some bad in the results,
therefore making it mixed, right.
So that's the impression that everybody's getting when they
read these type of headlines. Let's go ahead and take a look
at how mixed these results really are.
S&P Global non GAAP earnings per share of $3.12 misses by 1 cent.
That is the mixed results. One penny and earnings per
share. And that's not one penny.
When it was supposed to earn 2 pennies, that's one penny.
When it was supposed to earn $3.13, meaning that they were
off from the analyst estimates by less than 1/3 of 1%, that was
the mixed results. This is the type of technical
miss that a company can have. That's very pass fail.
But if we look at this through any realistic lens, this is
basically in line with their expectations.
They literally hit their earnings per share within a 1
penny margin of error. That is in line now the revenue
beat by 40 million, so I guess that is good news.
But overall investors are looking at that one penny miss.
So we have those mixed results, dragging down the company by 7%,
shaving off $8 billion worth of market cap.
And this is what makes it even more silly to me.
This is what means that investors are having a big
overreaction. Let's go ahead and bring up S&P
Global's actual earnings report here.
And there's one part of this that I think is really
important. If we Scroll down and we get to
the company's actual guidance where they give how much they're
going to earn and all their different financial metrics for
the year, S&P Global is one of these companies that's very kind
to investors. They're an incredibly investor
focused company and what they do is they give more detailed
guidance than most companies in the market.
Most companies don't try to give you much details on cash flows
or operating cash. They might give you some revenue
growth, maybe some CapEx guidance, but most of them do
not give guidance to this level of detail.
And S&P Global reiterated, meaning they reaffirm the same
guidance they gave previously for their revenue growth,
operating profit margins, tax rate, diluted earnings per share
and free cash flow. Every single operating metric of
this business, They reiterated the same guidance.
They said they're going to earn the exact same amount that they
said 1/4 ago. So in terms of their opinions of
how profitable the company is going to be by the end of this
year, it is identical. Nothing has changed quarter over
quarter. The only thing that has changed
over the past couple of days is the price.
Now in terms of valuation for the company.
S&P Global makes this very easy. They basically spell out how
much money they're going to make this year, and the reason they
can do this is because their business operates with such
predictability and such efficiency.
Most companies cannot tell you exactly what their free cash
flow will be for the entire year, but S&P Global can, and
they say it will be between 4.2 billion and 4.3 billion.
So I'm going to assume they make the higher end of that $4.3
billion. I think they'll be able to hit
that metric with a $128 billion market cap and $4.3 billion of
free cash flow. We run a very simple calculation
and we see that the current yield based on 2020 three's cash
flow is 3.3 percent, 3.3% and they don't have much stock based
compensation at all. So that is a clean 3.3%.
So this company is actually much cheaper than it looks on all the
calculators that are backwards looking.
So I don't believe that this company is all that expensive.
I think it's trading at a very reasonable if not low valuation.
And another fun thing we can look at with S&P Global is what
this 4.3 billion will look like when it's added in at the end of
the year. This is about what it will look
like right here. We'll have cash flows climbing
around that high, an all new high in free cash flow in 2023.
So by number one of the week, SP Global.
Now moving on to #2 and who would have guessed it's Texas
Roadhouse. This is a company that I've
talked about a lot, so I'm not going to review the entire
investment thesis on it. If you're someone that has
joined the channel just recently, which we've had
thousands and thousands of new subscribers.
So I appreciate you following along.
Just search my name in YouTube with Texas Roadhouse and you
will get plenty of content. I've done extensive videos
covering this company. Texas Roadhouse is a great
company, a great compounder, even though it operates in the
restaurant business, which is operationally difficult,
difficult to succeed in, and faces many competitors.
Texas Roadhouse has a business model that is a fold above other
competitors and you can see that in their longterm financials.
Continual secular revenue growth, continual earnings per
share in that income growth, continual free cash flow growth.
And this company's hitting a scale point right now, an
inflection point in its cash flows where it's really
generating more cash than they really know what to do with.
So they're returning a ton of money back to the investor.
Now, the interesting thing about the market is sometimes it just
doesn't make sense. That's what the market does.
It's based off of emotions and trading and geopolitics and
economics and how people feel consumer sentiment as well.
So a lot of times that trading with individual names simply
doesn't make sense for a period of time.
In this case, Texas Roadhouse traded down around 2% yesterday
after reporting earnings. If a company trades down after
earnings, you can believe one of two things.
Either the company was overvalued or they posted
underwhelming earnings. And in this situation, neither
of those scenarios happen. Texas Roadhouse is not
overvalued and the company did not report poor earnings.
They didn't just have good earnings, they had great
earnings. They beat on the top and bottom
line of the annals estimates. They grew their total revenue by
14.3%. That is very fast revenue
growth, and I've repeated this for about two years.
Texas Roadhouse is growing faster than most of big tech.
The company's growing faster than most tech companies as a
restaurant. And while they're growing their
top line very quickly, they're also, more importantly, growing
very profitably. Their net income grew by 13.6%,
and then they must have done buybacks because their earnings
per share grew by 14.7%. So we have a company growing
nearly 15% earnings per share trading at a valuation that's
much lower than a lot of other companies growing much slower.
That just doesn't make sense. Comparable restaurant sales up
9% year over year, that is incredibly good.
Same store sales comp, Their sales now at each restaurant are
averaging 146,727 per week. That means they have revenues of
around 7 to $8,000,000 per restaurant every year.
They open up 6 new restaurants during the quarter and the
company repurchased 200 and 13,000 shares for $23 million.
So while they can afford to do CapEx and reinvestment back into
their business, opening up new restaurants at a pretty
aggressive pace, they're also returning cash back to the
shareholders. So what we have with Texas
Roadhouse is a company that continues to have tight
operations, fast growth, revenue growth, far above the market
average, around double the market average, growing
economically profitable, 15% earnings per share growth year
over year, growing while opening up new investments, 6 new
restaurants opened, more buybacks, more dividends.
They're returning cash back to the shareholder.
And they're doing all of this while being at a low valuation,
a 3.5% free cash flow yield and A20 4PE ratio.
And then on top of that, they have next to no liquidity risk
because the company has no longterm debt.
That's the company we're looking at with Texas Roadhouse.
Why did it sell off 2% after these earnings?
I have no clue. Maybe investors are worried
about a recession. Maybe it's a slowdown in the
economy. That could be it.
But Texas Roadhouse does fine in recessions.
Try to find the recession on the chart.
Can you find it? Can you even see it?
They do fine in recessions. Maybe it's because investors
wanted to take their gains and move on.
Who knows the reason Investors do different things.
All I know at this company is that every metric I look at is
headed in the right direction. So I bought another $2000.00 of
Texas Roadhouse. So those are the two companies
that I bought that were within My Portfolio.
But I actually ended up introducing a new position to
the portfolio, a brand new company and one that was on my
watch list. If you recall earlier this week
I highlighted a number of companies that I was looking for
if they had a potential sell off or if I really was convinced the
company had a very good longterm prospect.
And although I'm extremely bullish on everyone of these
companies, I really would feel comfortable owning all of them.
I did end up adding one of them to the portfolio this week.
Is it fair, Isaac Marriott, Chipotle, Moody's, Visa, MSC
Global, some of you know that are part of the Patreon and
Discord. Let's go ahead and look at the
new pick. Here we have Chipotle, the fast
casual Mexican Grill. I know this is a bit surprising.
A lot of you are probably confused of why I added this
company and I want to explain that now.
Now before you race to judgment, a lot of people like to jump in.
They like to do this with any new company.
They come in and they look at the price of the company.
It's trading at a very high dollar amount.
They look at the P/E ratio and go, Joseph, this company is at a
high P/E. This company is overvalued.
Look at that valuation. How could you buy a burrito
place at a 35 Ford P/E? How does that make any sense?
Calm down just a minute and let me explain the reason I added
this company to the portfolio. It has a lot more to do than it
being a burrito company or having tasty food.
It has a lot more to do than the immediate PE ratio at trades at.
What I plan on doing over the next couple of minutes is giving
an overview of the real reasons that I bought into Chipotle and
it fits within a bigger grander scheme than just this company.
Specifically see, as I was looking at My Portfolio over the
past year, I was looking at companies and industries that I
believe will benefit the most from artificial intelligence and
robotics. And when I look and do analysis
on this, most people are driven to tech companies.
They believe that tech companies will be the biggest beneficiary
from AI and robotics, and that may be true.
I think these companies will benefit to a big extent, but I
think there's other industries that are going to benefit
heavily from robotics, optimization and AI.
And in particular, I've always thought for a long period of
time that restaurants will be one of the main beneficiaries of
this. In fact, I've done episodes
highlighting how I believe companies like McDonald's,
companies like Chipotle, companies like Wendy's are going
to have massive benefits from robotics, automation and a I.
So when I look at this industry, I see huge potential here over
the next decade for greater amount of automation and higher
margins. Now I already have one
restaurant company which is Texas Roadhouse, but I don't
think that Texas Roadhouse is comparable to Chipotle because
although Texas Roadhouse sells food, and that's a similarity,
their business models are different.
Texas Roadhouse is a sit down, dine in restaurant where you
mostly eat at the location. They have very small amounts of
takeout and they have no drive through.
Chipotle is a fast casual restaurant, meaning that most
people don't go into the restaurant and sit down and get
food. That's a way around 40 to 50% of
the people eat, but around half of them get it to go either
through delivery like DoorDash or they get it to go through the
Chipotle Lane. They pick it up and go.
So even though both of these companies work with food, they
are vastly different and Chipotle is even different than
a lot of other fast casual restaurants.
And what I'd like you to do when we look at Chipotle is rather
than view this company as a burrito or Mexican food place,
view it as a business model. That is what we are doing
analysis on. We're not buying steaks, we're
not buying burritos. We're buying business models.
So let's go ahead and talk about the business model of Chipotle.
The core business model of Chipotle relies on creating an
enhanced fast food experience, combining elements of fine
dining with convenient and quick service restaurants.
Creating value for customers by offering quality foods.
Foods that are perceived by many by most as being healthier
alternative to many other fast food competitors like McDonald's
or Burger King. The dining environment and
efficient service creates a fast casual experience.
This fast casual experience resonates particularly well with
middle and upper class individuals, people that make
more money and have more predictable household income.
This demographic of customer makes Chipotle stand out from
the rest of the competition. Chipotle tries to combine two
different aspects. They want their food to be
incredibly fast. They want it to be faster than
McDonald's, faster than Burger King, but also highquality.
That second part is very difficult to accomplish.
Creating fast food is one thing. Many companies can do that.
But to create food very fast that's also highquality and
somewhat healthy makes it much more complex.
And historically, trying to combine these two things, both
fast and highquality, is difficult to do.
And most restaurants focus on one or the other.
They don't want to beat both. McDonald's is fast.
It's not high quality. Chipotle's trying to do both of
these at the same time. The way that you measure how
fast a restaurant is is through a measurement called throughput.
That is, how many people can go through the restaurant and get
their food within a 10 minute time period.
Chipotle's throughput can turn over around 300 customers per
hour on average. The way that Chipotle is able to
accomplish this incredible throughput through their
restaurants is by having their specific ordering system.
You've seen this now at probably a lot of restaurants because
there's a lot of them adapting the same type of operating model
to some extent. But they have an assembly line
where all the food is laid out in a table in front of the
customer, and then they move from left to right, constructing
the perfect burrito or burrito bowl.
The workers on the assembly line each take ownership of a small
segment of the work. The division of Labor makes it
so that there's a lot more efficiency when going through
the line. This sets them up for
consistency across the entire process as well as making it
much quicker overall. And Chipotle is doing advanced
logistics things with AI to recognize demand and different
part of the restaurants that make it so the company can
increase this overtime. That is the fast part of
Chipotle. That is the fast food part,
making it so that you get in and out of the store quickly.
The last thing that they want is for people to look at Chipotle
and think it takes forever to get my food there.
That is one of the biggest things they're trying to
accomplish is increasing throughput and they've made big
advancements on that in the past year.
But what about the highquality part?
That's where Chipotle is highly differentiated than most of
their competitors. They only resource highquality
ingredients and prepare their food fresh in stores.
They have no freezers because the company believes you can
taste the difference between a store that has freezers and one
that doesn't. This decision reflects the
pricing premium. Chipotle has higher quality
foods, so they can charge a higher quality price for it.
They also only sell full price items and rarely run promotions,
which is very uncommon strategy given competitors like Taco Bell
that run promotions every day of the week.
They're always trying to give away certain parts of their
food. The decisions that Chipotle
makes to not have the fast food style of marketing is
intentional. They want to be differentiated.
They want to be looked at as having better, higher quality,
more prepared food than most of their competitors.
You may notice that Chipotle doesn't include a lot of items
that would be off brand. They don't sell you sugar
cookies at the beginning of the line because they know that
would be perceived as unhealthy and they want everything in
their company to be real foods. So there's a little bit about
Chipotle's overall business model.
In summary, it's fast food because you can go in and get it
very quickly. You can get it efficiently
through a digital app, you can order ahead or you can have it
delivered fast. Is a huge part of this company
and the throughput is a major focus of them.
Now, while they're focusing on fast, they're also focusing on
high quality. Chipotle wants to make the type
of food that you can eat every day and not feel bad about
yourself, not feel like you're destroying your body by eating
the food. And that's because of the high
quality ingredients and the overall recipes that are made
with health in mind. So you have that mixture of
higher quality fast made food. Now the next thing I'd like to
focus on when I look overall at these type of companies and you
can include a lot of different fast food type of companies in
this category, I think all of them will benefit.
But I believe Chipotle has ample room to benefit here, and that
is automation and efficiencies. That's the next thing I'd like
to focus on. I believe Chipotle is going to
be a huge beneficiary of automation, robotics and AI over
the next 10 years. A lot of these things aren't
hypothetical. There are things that are
happening right now. And in the immediate future, we
have things like this. This is a robot called Chippy.
Not that, man. They're cutting the limes, but
we have this right here, this machine called Chippy, which
literally makes homemade fresh chips, and it seasons them
robotically. This is new technology.
This is efficiencies happening real time.
Currently, right now, it's humans doing all of this work at
every restaurant. Humans make the chips in the
restaurant every single day. So what are they doing?
They're investing in the Chippy, a robot that could potentially
replace the humans, and they're going to start testing it in new
locations. This is one form of automation
that will reduce the amount of Labor necessary.
Reducing the amount of Labor means more optimization.
More optimization means higher margins for investors.
Now, one of the most difficult part of food prep at Chipotle is
avocados. These guys sell a ton of
avocados because it's in almost everyone of their recipes.
Everyone of their meals on their menu has avocados, so they're
one of the biggest avocado buyers in the world.
And these avocados have to be hand prepared by chefs working
at Chipotle every single day. The chefs at Chipotle have said
that this is one of the most difficult part of preparation.
You have to do it by hand. It takes a long time.
They have to go in way ahead of the opening of the restaurant to
get this prepared. And the employees have
complained about doing this task.
So in comes the Autocado. This is a machine where you can
see that they just dump in avocados.
It goes through this roller and then somehow there's magic that
happens. A lot of cutting, a lot of
tooling, and then there's a shelf of prepared avocados.
The only thing left is to mash them.
And I believe the reason that they aren't mashing them with
the robot is simply so they can say that they're hand mashed.
But this is real automation being rolled out in their
restaurants. Right now.
This is only in a couple restaurants out of their 2300,
but this will be rolled out into more restaurants over the next
two years. So we have chip makers, avocado
preppers and it doesn't stop there.
The grilling is called the most difficult part to train for.
Chipotle likes to have their chicken be juicy and be seared
on both sides excellently every single dish.
They don't want people to have bad experiences with the chicken
not being tasty or having a good sear.
But more importantly than that, for the efficiencies of the
company, the productivity of each restaurant is how long it
takes to grill chicken. On average right now it takes
around 16 minutes for Chipotle to grill their chicken, 16
minutes because they use a normal flattop grill where they
have to repeatedly turn the chicken over and over until it's
seared and grilled on both sides.
Flattop grills only heat one side at a time, so you have to
flip it over to heat both sides and get that sear on both sides.
Chipotle is investing in different ways to increase the
productivity of their grill and this is where the double sided
grill comes in. It's also called the Clamshell
grill. Some restaurants are already
testing out and using this new double sided grill.
Chili's is one of them and other burger places have invested in
it as well. The grill we developed clamps
and does the press for employees so we don't have to have a super
strong or have long arms, they just bring down the press.
That press also creates a more consistent burger.
If you go to a Chili's that has this double sided grill, you'll
notice that the burgers are perfectly cooked with smash
burger style on both sides every single time.
And that's not because the chefs magically got better at the
restaurant. That's because they invested in
a highly expensive but incredible double sided grill
and these grills are rolling out in Chipotle.
Chipotle actually has more to benefit from burger joints
because chicken takes longer to cook than most burgers.
Chipotle says that they cut down the cook time of their chicken
from 16 minutes to under 4 minutes, huge savings in the
amount of cook time. This has a huge benefit for both
the employees and the customers at each restaurant.
They can cook chicken more evenly because it does a perfect
syrup on both sides. They cook it in less than half
the time, meaning that they can cook it in smaller batches so
the chickens more fresh at every restaurant that has this grill.
And if they ever run out of chicken, it's only four minutes,
not 16, that they have to wait for customers to get their
chicken O. The benefits of this double
sided grill when it rolls out to new locations is further
roductivity gains now. Right now, this grill is only in
10 locations. They've been testing it, but
Chipotle plans to roll out the new grill to their locations
over the next two years. They're going to be making that
CapEx investment, putting in the large bulk orders and making
this the standard across all of their restaurants.
So you can see the theme here. We have robots making chips, we
have robots prepping avocados, we have double sided clamshell
grills that give a perfect sear and cut down on cooking time.
And then we have the Holy Grail, What this all culminates to
eventually This seems a little farfetched, but I just want to
follow along here for a minute. Robotic make lines, The make
line is the prep line at the beginning of Chipotle where they
put the food in the bowl for you or they form the burrito for
you. And Chipotle's investing in
fully automated make lines. Chipotle announced that they're
investing in a company called Hyphen, a food service platform
designed to help restaurant owners, operators, and budding
chefs move their business forward by automating kitchen
operations. The company's first product, the
Make Line, is an automated system that utilizes advanced
robotics and a customized operating system to give busy
kitchens a reliable and precise way to make and fulfill orders.
The Make Line assembles all digital orders under the counter
via automated production while allowing staff to assemble
inhouse orders from top of the counter.
So this is a fully automated system for making food, for
prepping all of it and assembling it.
This is the overall Holy Grail of where all of this automation
leads to. Ultimately, I believe long
enough down the road that these type of companies that have
entrenched market positions and the CapEx to be able to invest
in these type of technologies will benefit dramatically from
improved efficiencies between digital applications, robotics
and AI. I believe these companies will
become heavily automated over the next decade, leading to much
greater efficiency and much higher margins for the investor.
I've said before that I basically view fast food
restaurants as glorified vending machines.
They're basically like a traditional vending machine, but
instead of spitting out a candy or a soda pop, they spit out a
hot consistent meal, One that people look forward to, one
that's so efficiently ran, so inexpensive compared to going to
the grocery store that they are the preferred option for all of
millennials and the younger generation.
These type of advanced vending machines, whether it's
McDonald's, Wendy's, Chickfila or Chipotle are going to become
more and more advanced overtime. Chipotle is investing heavily in
these advancements and you can see it across all of their
efforts. So I believe automation will
play a huge role in the future of this company.
Now we can't talk about automation and AI without
mentioning the digital properties this company has the
Chipotle app. Apps can seem like not a big
deal right? Who cares if a restaurant has an
app or not? But some cases they make all the
difference. Consider Starbucks's app that is
a massive part of the investment thesis of Starbucks.
Everybody knows that Starbucks app turned the company from a
simple drink place, a coffee place, to a place where they're
a natural bank. They have billions of dollars of
customers money without any cost of capital, leading to
incredible growth in the company.
The apps make a big difference, and it's the same in the case of
Chipotle. Around half continually use the
app for digital orders before pickup, so it's heavily used.
Their customer base uses this app, and that's hugely
advantageous for Chipotle. Like most of these companies,
they have a good rewards program.
Every time that you go and eat food at Chipotle, you can scan
your app or you can order ahead with the app.
And a lot of people are doing that ordering ahead.
When they do that, they earn reward points.
When they earn reward points, they can get different food or
different items for free. So it incentivizes customers of
Chipotle to continually go back and eat there again.
And to further incentivize people, they make the rewards
temporary. They don't last forever.
They only last a couple of months.
Chipotle will give you reminders to use your rewards for the free
food before they expire. That makes it so you have
pressure. You have some urgency to go back
to Chipotle and use up those free points.
If you don't, they expire worthless.
So this creates A virtuous cycle for Chipotle.
People come in to use their rewards.
While they use their rewards, they earn more rewards, which
incentivizes them to come back again over and over again.
The cycle continues. Now that's great.
The reward system is really fun. They also gamify it, and they
give you little achievements and badges when you hit certain
amount of points. But that's not even the biggest
thing I want to point out with the app.
Although the reward system is great, I believe where Chipotle
really stands above the competition is the level of
customization within the app. In most companies, you can
customize a few things, but not anywhere close to the level of
Chipotle. If you get a burrito bowl, for
example, you can pick your protein.
There's seven different options. You can mix and match that with
two different types of rice. You can add in two different
types of beans, and then there's ten different types of toppings
that you can mix and match on this bowl.
That is a level of combination and customization that most
restaurants do not give you. You can't go in and mix and
match that many parts of most fast food meals, but Chipotle
has the technology and the ability to execute on these
orders that are highly customizable.
The only company that I believe is somewhat synonymous to
Chipotle in this regard is Starbucks.
Starbucks is highly customizable with their drinks, and both
companies have had to go through great efforts to make that
achievable. So it's not just an app that
gives a little bit of rewards, it's a highly customizable
system that allows you to customize your meal, order it
ahead of time, and pick it up at a certain time, leading to an
overall better system. This is an ecosystem that takes
a long time to build, and most restaurants, especially ones at
this scale, don't have close to this good of a system.
So between the robotics and the huge digital properties,
Chipotle sees a lot of optimization in both their
logistics and in their restaurant operations.
And I just want to mention how difficult this is to accomplish
this type of feat at the scale that they are.
With nearly 3500 restaurants being able to have this type of
digital property, logistics, customization and efficiency is
incredibly difficult. A lot of people say it's easy to
create a burrito. They have a lot of competition.
Anyone can start a burrito place, that's true.
Anyone can start one single location burrito place.
But rolling it out to 3500 locations, building a digital
ecosystem, having it be highly efficient with the latest
technology in every location is much easier said than done.
And doing that while maintaining brand value over the same time
is even more difficult. So we've gone over the high
level business model of Chipotle.
The company operates fast and high quality food.
We've gone over a little bit of the optimizations and
efficiencies the company will have over time.
The next thing I want to talk about is the economics of the
company, the economics and evaluation.
This is one of my favorite parts of looking at a company and
we're going to be using Qualtrim this tool right in front of us
to be able to look at the economics.
If you want to try this out, it's part of the Patreon, you
can try it out with a free trial.
Now let's go ahead and take a look at some of the things
happening with this company. We already have the most recent
quarter here, Chipotle had $2.51 billion in revenue last quarter
and as you can see, there's nothing special.
This is right in line with their historical growth, right what
investors should be expecting. You can see right here when the
revenue actually declined substantially, that was the
foodborne illness outbreak of the company.
Now I'm not going to get into that subject now, but they've
taken a lot of steps to make sure that that's unlikely to
happen again. But over the past 10 years, we
have pretty consistent growth in their top line.
The growth is around 12% annualized for 10 years.
In the past five years, the growth has actually accelerated.
So we see consistent and accelerating growth in their top
line. Their top line grows in three
different ways. The first way is traffic.
I'll put tea here. Every time this company opens up
a new location, it has a certain amount of sales the first year
and then typically it has more the next year and then it has
more the next year after that. And those sales are driven by
more and more people, actual more traffic going to those
locations. People that fall in love with
Chipotle start going there more frequently.
They might only go a couple times a year and then they start
going every month and then they might start going a couple times
a month. That is an increase in traffic.
A main driver for this company. Now the next way they grow is
through price. Chipotle has great brand value
and pricing power because people fall in love with their products
and eat it routinely. They have a little bit of price
flexibility. Chipotle raises prices a little
bit. Most people are willing to pay
it. Now, pricing power with
restaurants is constrained. They can't raise prices
indefinitely. And over the past couple of
years, Chipotle has exercised their pricing power a lot.
So management has said they're taking a break from pricing
power. They don't want to raise prices
at all this year, but on average, they're going to be
raising prices slightly above the rate of inflation.
That's typically how it works with this type of restaurant.
So we have an increase in traffic and we have continual
increases in pricing. The combination of those two
grow revenue maybe 7 to 8% per year.
Then we have new locations, I'll put L there for locations.
Chipotle doesn't just have a set amount of stores that they
increase prices and traffic on. They're constantly opening up
new locations. This company is still relatively
immature. It's still a young company.
It's like a little teenager in terms of mature restaurant
companies. As of their latest quarter,
Chipotle has 3300 restaurants. That is a small amount when you
compare it to something like Starbucks.
Starbucks has 33,000 restaurants.
So Starbucks is an order of magnitude bigger in scale than
Chipotle, which is good news for Chipotle investors.
All that means is they have an ample runway for growth.
Chipotle management has said that they're guiding for 7000
stores within the US and Canada. So right now they're at 3300 and
they plan to double the amount of store count in just the US
and Canada, and that's not mentioning at all.
International growth. This long runway of growth is
incredibly important to the future valuation of Chipotle.
The company can literally grow their store count double simply
within the US Chipotle has mentioned that they're now
starting to open up locations in smaller cities because they see
a lot of success there. Right now, the highest
concentration of their locations is in places like California and
New York, highly densely populated big cities.
But they're having success everywhere.
And part of the reason why is people love Mexican food.
This is a known fact. It's not some big prediction
that people will like this type of food.
Most places this is well tested the sentiments already known.
Mexican food is widely accepted as a staple.
Chipotle also has ambitious expansion plans outside of the
US They're not only having great success in Canada right now, but
they're also opening throughout Europe, trying to make the
models work as good as possible in different regions.
They've also introduced, for the first time ever, a franchise
partner in the Middle East. They're going to be opening up
locations in Dubai and Kuwait starting in 2024.
The reason that they chose franchise partners for Dubai and
Kuwait is because they want someone that knows the
demographic there and knows how to sell their product and they
believe by partnering with this proven partner in the Middle
East that they can have success there as well.
So we can expect to see a lot of location growth both at home in
the US and internationally in Europe, in the Middle East and
all across the globe. The same footprint that
Starbucks followed, We can see pricing power with the company.
They've already demonstrated that they can raise prices
without losing customers. Their traffic is increasing even
after raising prices aggressively over the past
couple of years. And the three of these put
together lead to this continued top line growth.
Now outside of the top line growth, it's good to have good
economics. We want companies, but we want
them to be growing profitably and Chipotle is growing
profitably. Last quarter they had a record
high 543 million in EBITDA. They had an explosive record
high in free cash flow. Look at this previous quarter,
it's so much higher than they've ever had before.
We're up to 445 million in free cash flow.
And a great thing about this company is they don't have to
deal with that pesky stock based compensation to anywhere the
same degree as a tech company because as they grow, the size
of their headquarters stays the same.
Notice how over the past decade it literally hasn't gone up at
all. It's ebbed and flowed a little
bit, but it's still under 50 million.
They can grow their free cash flow and keep their headquarter
expense virtually identical. And on a free cash flow per
share basis, the numbers get a little bit crazy.
Over the past decade, Chipotle has grown their free cash flow
per share above 17% compound annual growth rate, and they're
doing this with even accelerated growth more recently.
Now one thing I love about this company is even though they're
generating a lot of free cash flow, they do it efficiently and
they have great top line growth. They have one of the
characteristics that I really, really love and companies and
that is the good oldfashioned business model of growing your
company through its own cash flows, paying for new locations,
paying for your CapEx with your own free cash flow, not paying
for it by taking out huge amounts of debt.
Chipotle has exactly 0 longterm debt.
Where companies get in a lot of trouble is by taking on that
longterm debt. Interest rates change, the debt
becomes more expensive, they have a more difficult time
getting credit and that leads to a lot of trouble.
Chipotle's like Texas Roadhouse. Neither of them have longterm
debt. Management doesn't like longterm
debt. They don't want to deal with it.
They don't want to take on the additional risk and I don't want
to as well as an investor. So this is something that's very
rare in the restaurant industry. Almost every restaurant has
longterm debt except for Texas Roadhouse and Chipotle.
Now one downside of owning Chipotle right now is I like to
focus on companies that have some type of return of capital
through dividends. I love having that cash flow
returned directly to my pockets so I can redeploy it where I see
fit. That's one of my favorite parts
about Vici, about Texas Roadhouse, about all the
companies that I own in the passive income portfolio and
Chipotle right now because of its, it's a little bit of a
teenager in the restaurant industry.
It's not a full grown adult and it's not at the situation right
now where it can pay a dividend. So it's not a dividend payer
currently. Right now they're still in the
earlier stages of growth and they're only returning capital
via share buyback. So you're getting around a 1.23%
return of capital through buyback, but they're just not at
a stage to pay a dividend. But this isn't all bad in my
opinion. I am buying Chipotle today as a
future dividend payer. I believe firmly this company
will be a substantial dividend payer in the future similar to
every other company like this one towards the end of its
growth trajectory, look at virtually any company in the
restaurant industry. We have McDonald's.
McDonald's is a big dividend payer.
Starbucks pays a big dividend, Texas Roadhouse pays a nice
dividend, Wendy's pays a fat dividend, Cracker Barrel pays a
really big dividend, Wingstop pays a dividend and Domino's
pays a dividend. And I could continue on.
All of these companies have something in common.
They're restaurant companies, whether they be fast food or
full service restaurant, and they're a little bit more
mature. And I believe fully that
Chipotle will get to the same point.
I think it's inevitable. It's just a matter of time.
Right now, Chipotle is in a situation where they're trying
to scale as quickly as possible. They're putting money into CapEx
for new investments in restaurants, new technology, new
automation, new app experiences, and they're trying to reach that
7000 restaurant in the US saturation.
I believe when they reach 7000 restaurants in the US, they will
be paying a dividend at that point and the people that bought
the shares earlier way before they paid the dividend will get
a much higher yield on cost than the people that will be buying
it. Then as a dividend payer, I'm
sacrificing what I believe is some current yield right now to
have greater yield in the future.
But with the predictability of the business model and the
industry that they reside in, I fully believe this company's
going to pay a dividend within the next 10 years.
So that's my thoughts on Chipotle and why I added it to
the portfolio. And I also think it's good to
mention to not blindly follow me into any trade.
I can't see the future. There is a chance that Chipotle
gets disrupted, that it goes out of business or something very
bad happens to it. Although I think that's
unlikely, there's always a chance.
Now one last thing I have to mention, I did clean up some
parts of My Portfolio by selling off non core positions.
I had some very small holdings in Pepsi, Nike and Estee Lauder.
When I say small, I mean these were just a couple $1000.
They were less than 1% of the portfolio.
All three of these I made gains in.
I made pretty big gains in all three of them.
So I sold Estee Lauder at a $1400 gain.
I sold Nike at a $1300 gain. I sold Pepsi at an $820 gain.
And I also recently sold the remainder of my Starbucks at a
$3369 gain. So I sold out of these companies
just to consolidate and sell off non core positions.
They're still great companies. They're still on my watch lists
and I'll be keeping U with these companies in the future.
O that's up for now. I hope you enjoyed the episode
in the analysis. I'll see you in the next one.