A look at Chipotle Mexican Grill and Starbucks after the major corporate shake-up

Starbucks (SBUX) just pulled off a massive poach...

In a move that surprised investors, the coffee giant announced yesterday that it had hired Chipotle Mexican Grill's (CMG) well-respected CEO, Brian Niccol, to be its new leader. According to the press release, Niccol will start in the new role on September 9.

And as you would expect, the two stocks made big moves in the aftermath. The news sent SBUX shares soaring nearly 25% yesterday, while CMG shares fell almost 8%.

The market's reaction is understandable, given that Chipotle had risen nearly ninefold (prior to yesterday's drop) since Niccol took over as CEO on March 5, 2018. Meanwhile, Starbucks doesn't even come close over the same period – and it trails the S&P 500 Index. Take a look at the big difference in performance:

A shake-up like that is bound to turn heads. So today, let's take a look to see if either stock is interesting at these levels...

I'll start with Chipotle.

As you can see in the following chart showing revenue and net income, the company has seen exceptional growth over the past two decades – especially since Niccol took over in 2018:

The problem is valuation. The stock is another beneficiary of the "quality bubble" I wrote about yesterday...

The following chart shows Chipotle's price-to-sales (P/S) ratio. The stock used to trade for a P/S ratio between roughly 2 times and 5 times. Since the post-pandemic recovery in late 2020, it has consistently traded at 5 times to 8 times sales, peaked at a ratio of 9.5 times earlier this year, and currently trades at nearly 6.9 times sales. Take a look:

On a price-to-earnings (P/E) basis, it trades at just more than 47 times this year's consensus analysts' estimates of $1.09 per share.

Chipotle is a great company, but the stock's current sales and earnings multiples are ridiculous. I'd argue that 25 times this year's earnings would be a fair multiple, so I have no interest in the stock while it's anywhere close to these levels.

Now, let's look at Starbucks...

As you can see in this chart of revenue and net income, it has also been an incredible growth story – though a choppier one:

And as you can see in the next chart, its stock also experienced a "quality bubble" in late 2020 to its all-time peak in mid-2021 – rising from less than 4 times sales to more than 7 times sales:

The difference, however, is that SBUX has fallen out of favor – so much of the excess valuation has been squeezed out of it.

Even with yesterday's jump, it's only trading at less than 4 times sales and about 27 times this year's earnings estimates of $3.57 per share.

Those are still rich valuation numbers... but not ridiculous ones like those of CMG – and the stock might prove to be cheap if Niccol can work anything like the kind of magic he did at Chipotle.

For more color on this, I called my old friend Lloyd Khaner of hedge fund Khaner Capital, who pitched Starbucks at my Value Investing Congress in New York City on October 19, 2009. Here was the exact slide he presented:

(Note that the "3 Year" and "5 Year" earnings-per-share and price targets on the last two lines of his slide need to be halved to reflect a subsequent 2:1 stock split.)

It was an incredible call – Lloyd rode the stock, then at $10.47 per share, to more than $100 per share before he exited a few years ago.

When I called him last night, here's what he had to say:

Niccol isn't only a great CEO, but a great turnaround CEO. He turned around Taco Bell while at Yum! Brands (YUM) and then did the same at Chipotle.

A special turnaround CEO, which he is, is a rare breed – and he's got it.

So he's perfect for Starbucks.

I then asked him what his game plan for Starbucks would be. He replied:

They need to cut prices, focus on service, shine up the stores, and develop new products that don't go too far afield (which they've done in the past).

Because Niccol has so much experience with food, he brings an "X factor" there. Starbucks has never had much success with food, so he might be the person to lead new product innovation that delivers food people will crave – to finally get food right.

And they need to reenergize and reprice beverages. They have to cut prices aggressively to say to customers, "Hey, we care about you." Starbucks is well positioned to do this – it will hit competitors hard.

They have a lot of information on customers from their loyalty program. They need to find a way to engage their casual customers. Niccol has been great at loyalty programs. Starbucks' is already good, and he will make it better.

Finally, I asked if he would be interested in buying the stock at current levels. As he told me:

For my turnaround discipline, it's too soon.

You need to have a numbers reset. Starbucks has been under-earning, so earnings will be better a year or two from now.

I want to make sure he's a good cultural fit (that was the problem with the prior CEO, Laxman Narasimhan).

I'm less focused on the valuation and more on how he turns around operations. If he does so, I'm willing to pay up.

But this is going to take time. Normally I would say that this is a three-year turnaround, but maybe Niccol can do it in two.

Thank you, Lloyd!

I think he's right. Starbucks could be a very profitable investment... but I would want to hear Niccol's plans and see him on the path to executing them before putting my money to work.

I'll also note that in our flagship Stansberry's Investment Advisory newsletter, we've long-respected Starbucks' business and have been writing about it since 2008...

It's a classic example of what we call a "capital efficient" business – the kind of business that can grow without having to make significant corresponding capital investments. Capital-efficient businesses like Starbucks – and McDonald's (MCD), Hershey (HSY), and Microsoft (MSFT) – are the source of many of our best-performing long-term recommendations.

In fact, the Investment Advisory team had recommended buying shares of Starbucks back in October 2018. Earlier this year, the position in the model portfolio triggered its 25% trailing stop after the company released a disappointing second-quarter earnings report.

We closed the Starbucks position and booked a 52% gain... but as we noted in the May Investment Advisory monthly issue:

We still like the company's long-term prospects and may add it back to our portfolio in the future when the time is right. But for now, we're protecting our capital and locking in a solid gain.

That's the key – when the time is right.

My team and I at the Investment Advisory will be watching Starbucks carefully. If Niccol can reignite the shares of this blue-chip coffee empire, it could turn into another great opportunity for us.

If we decide it's time to invest again, we'll let Investment Advisory subscribers know. To learn how to become one – and gain instant access to the entire portfolio of open recommendations – click here.

There's also one final point I'd like to make – following up on Monday's e-mail about Nike (NKE)...

If Nike replaces the current out-of-favor CEO with one perceived to be better – as Starbucks just did – I would also expect NKE shares to soar the next day... just like SBUX.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.