The best stock to buy right now: Chipotle vs. Starbucks

Chipotle Mexican Grill (CMG 0.49%) and Starbucks (SBUX 1.72%) they have recently seen their stocks go in opposite directions. On Aug. 13, Chipotle announced that its CEO Brian Niccol — who has led the fast-casual restaurant’s impressive revolution over the past six years — will leave at the end of the month to become the new CEO of Starbucks.

Chipotle shares have fallen 6% since then, and Starbucks shares are up 23%. That price action suggests investors expect Chipotle to struggle without its star CEO, but also hope it will reignite Starbucks’ growth. Should investors be chasing Starbucks and selling Chipotle? Or should investors stick with Chipotle and avoid Starbucks’ hype-driven rally?

Image source: Getty Images.

Can Chipotle Continue to Grow Without Niccol?

Chipotle’s comparable restaurant sales (comps) fell in 2016 and 2017. That slowdown was caused by several food poisoning outbreaks, tepid adoption of its mobile app and stiff competition from other fast-casual chains.

To reboot its business, Chipotle hired Brian Niccol, the CEO Yum BrandsTaco Bell as its new leader in 2018. Under Niccol, it launched new grab-and-go ordering options, expanded its mobile app with more features and analytics tools, and launched a rewards program to block repeat customers.

Niccol also halted Chipotle’s crushing discounts and promotions and allocated spending to fresh television, social media and digital advertising to reboot its brand. The company has also repeatedly raised menu prices to counter inflation.

Those efforts paid off, and his compensation grew 4% in 2018 and remained positive for the next five years. It expanded its store count from 2,491 in 2018 to 3,437 in 2023, and its revenue had a five-year compound annual growth rate (CAGR) of 15%, as its earnings per share (EPS) had a CAGR of of 47%. That’s why its stock is up more than 220% over the past five years.

Scott Boatwright, who has been the company’s chief operating officer since 2017, will succeed Niccol as interim CEO. The company insists Boatwright will stick with Niccol’s current strategies “without disruption,” but investors should see if it can continue to grow its comps as it opens new stores and expands its operating margins at the restaurant level.

Analysts expect Chipotle’s revenue and earnings to grow 15% and 21%, respectively, this year, but its stock is still richly valued at 48 times forward earnings.

Can Niccol revive Starbucks?

Starbucks shares rose after Niccol’s appointment, but have fallen 2% over the past five years. The chain’s companies declined in fiscal 2020 (which ended in September 2020) as the pandemic spread, and grew by 20% in fiscal 2021, 8% in fiscal 2022 and 8% in fiscal 2023.

In fiscal 2024, Starbucks’ growth has petered out. Its global businesses grew 5% in the first quarter, but fell 4% in the second quarter and fell 5% in the third quarter. During those two quarters, comps were down single digits in North America and down double digits in China.

In North America, Starbucks slightly offset its transaction decline with a small increase in its average ticket size. But in China, its total transactions and average ticket size both fell. This is a grim situation, as the US and China are Starbucks’ biggest markets.

This slowdown can be attributed to the effect of inflation on discretionary spending and the company’s limited pricing power in an increasingly saturated market. There is fierce competition from Dutch Bros in the US, Luckin coffee in China and other companies — and that pressure isn’t abating anytime soon.

Laxman Narasimhan, who succeeded Howard Schultz as CEO last April, was unable to resolve these issues before he was ousted. Starbucks is offering Niccol a massive pay package worth up to $113 million to restore the business, but it will be an uphill battle.

Starbucks is a much bigger company than Chipotle, and Niccol doesn’t have much experience in China. Its digital steering wheel has also matured, so Niccol can’t simply improve its digital capabilities like it did with Chipotle.

For now, analysts expect Starbucks’ revenue and earnings to grow 2% and 1%, respectively, in fiscal 2024 as it struggles to grow in the U.S. and China. At 24 times forward earnings, its stock doesn’t look cheap relative to that anemic growth.

Buy better: Chipotle

Chipotle’s stock is more expensive, but it doesn’t face as many existential challenges as Starbucks. The loss of its turnaround CEO is disappointing, but it is still led by the COO who executed those turnaround strategies for the past six years. So if you think Chipotle can maintain its current momentum, then it still deserves its premium valuation.

Starbucks has deeper problems. Hiring Niccol is a step in the right direction, but there is no guarantee that he will be able to solve the ongoing challenges. For now, I’d stick with Chipotle instead of watching Starbucks’ recent rally.