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Topic: Growth Stocks

Growth stocks: Fast-food chain thrives on higher quality and natural foods

Growth Stocks: Chipotle Mexican Grill

The fast-food business is generally associated with inexpensive food and plain décor. It is rarely associated with healthy eating. But one U.S. chain has adopted a higher quality approach, so far with success.

CHIPOTLE MEXICAN GRILL (New York symbol CMG; www.chipotle.com) is a Denver-based Mexican-restaurant chain. The company charges slightly higher prices than fast-food chains, but it offers higher-quality food, including naturally raised meat, and better decor and service.

In the three months ended September 30, 2011, sales rose 24.1%, to $591.9 million from $476.9 million a year earlier. The company’s restaurants attracted more customers during the quarter, and it raised its prices. That pushed up same-restaurant sales by 11.3%. As well, Chipotle opened 32 new outlets. Earnings per share rose 24.5%, to $1.93 from $1.55.

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New natural food restaurant has “a line out the door every day”

Chipotle now has 1,163 locations, including the ShopHouse Southeast Asian Kitchen test restaurant it opened in Washington, D.C., in September 2011. ShopHouse sells meat made from naturally raised animals and buys vegetables and other ingredients—including garlic, lemongrass, ginger, turmeric and galangal (blue ginger)—locally.

The company says the ShopHouse restaurant has been successful, with “a line out the door every day.” It is already planning to open a second location.

Chipotle trades at nearly 44 times its forecast earnings for this year. That’s a high ratio that leaves the stock vulnerable if it runs into any short-term problems.

In the latest issue of Stock Pickers Digest, we examine whether Chipotle can continue to increase its following among health-conscious baby boomers in the fickle and competitive U.S. restaurant market. We conclude with our clear buy-hold-sell advice.

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