BERNSTEIN: These 2 fast-food companies are being overlooked by Wall Street

BERNSTEIN: These 2 fast-food companies are being overlooked by Wall Street

Chipotle Test Kitchen 9

Hollis Johnson

  • Chipotle and Yum Brands are undervalued, according to a Bernstein analyst.
  • Using a not-so-common valuation metric that measures the enterprise value of a company against its projected growth, Bernstein found that Chipotle and Yum Brands were attractive bargains.
  • Watch Chipotle's and Yum Brands' stock prices move in real time.

While investors are eager to see turnarounds at Chipotle and Yum Brands, a Bernstein analyst believes they have overlooked the two brands as investment opportunities.

Using an alternate way of valuing their stocks, both Chipotle and Yum Brands are "somewhat undervalued," Bernstein Analyst Sara Senatore wrote in a note to clients.

Most market watchers use an earnings multiple to evaluate a company's value. Senatore looked at the enterprise value - which adds the market value of its common stock, preferred equity, debt, and minority interest minus its cash and investments - coupled with the companies' forecasted growth to determine a "line of best fit" for businesses in the fast-food and casual dining industries. Those below the line are considered bargains while those above are potentially overpriced.

According to this metric, Chipotle and Yum Brands have room to grow.


"Our outperform ratings on YUM and CMG are consistent with our valuation work; both sit below the line of best fit for the industry, suggesting the stocks are somewhat undervalued (on EV/IC) relative to their fundamental outlooks," Senatore said.

Wall Street has been optimistic over Chipotle's soon-to-be CEO Brian Niccol, who the food chain tapped from Taco Bell. Chipotle has dealt with a series of challenges to reverse its bad image after multiple cases of customers falling ill and failed attempts to introduce new items on the menu that would resonate with consumers, such as its queso.

With Yum Brands, "expectations have been reset," Senatore said. The company reported revenue and same-store sales in the fourth quarter that had fallen short of Wall Street's expectations, particularly on weaker demand from Taco Bell and Pizza Hut. Investors are looking forward to a turnaround at Pizza Hut, she said.

Senatore gave Chipotle a price target of $500 per share, which was 56% above its current share price. The price target for Yum Brands was $92, which was 12% above its current price.

Chipotle's stock was trading at $318.18 per share, and was up 8.68% for the year. Yum Brands was trading at $81.39 per share, and was down 0.27% for the year.

Read more about why investors are happy with Chipotle's new CEO choice.