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Why This 1 Restaurant Play Could Be Like Buying Domino’s 5 Years Ago

Why This 1 Restaurant Play Could Be Like Buying Domino’s 5 Years Ago

Domino’s has surged 238% over the last 5 years, and one trader says this 1 stock looks like a similar winner right now.

Chipotle (NYSE: CMG) shares have slid nearly 3% since Tuesday after the burrito chain reported earnings that were lower than expected. 

The company said it earned adjusted earnings per share of $3.48 on revenue of $1.6 billion, while analysts were looking for earnings of $3.73 per share on revenue of $1.61 billion.

Chipotle said that increased expenses due to the coronavirus pandemic knocked off $0.32 per share from profits, and performance bonuses impacted results by another $0.09 per share. Without these, the company would have reported earnings of $3.89 per share.

The stock is up more than 73% over the last 12 months, and one trader says it is priced to perfection.

“I love the company, I love what they’ve done, I love what they’re doing right now with rolling out these new stores, but I don’t love the valuation,” said Strategic Wealth Partners president Mark Tepper. “They’re doing everything right, but the price in my opinion already reflects that.”

Tepper added that Chipotle’s mobile, digital, and delivery strategy is strong, however, he has his eye on another restaurant stock that he says might be a better play for those trends now.

“I would personally rather do that through Wingstop (NASDAQ: WING),” Tepper said.

Wingstop—which has a market cap of $4 billion—is up more than 15% year-to-date, and up 64% over the last 12 months.

“They have an asset-like business model that leads to better gross margins,” Tepper said of the chicken wing chain. “It’s a very quick [return on investment] for franchisees which further drives additional unit growth.”

And there’s another hot name in the restaurant space that Tepper says Wingstop reminds him of.

“It kind of reminds me of Domino’s Pizza (NYSE: DPZ) about five years ago and we all know what happened to Domino’s over the course of that timeframe,” Tepper said, “it basically quadrupled so that’s how I play this trend.”

Domino’s shares have gained 238% over the last five years, while Chipotle has gained 221% in the same timeframe. 

Tepper isn’t the only one on Wall Street bullish on Wingstop. Goldman Sachs analyst Jared Garber rated it a Buy last month, while Wedbush rated the stock an Outperform this week and boosted its price target from $140 to $175.

One positive for Wingstop is that the coronavirus pandemic has made chicken wings even more popular. After local governments around the country forced restaurants to close for indoor dining to help stem the spread of the virus, takeout and delivery orders took off sparking a surge in purchases of wings.

“Wings are going up day after day,” said Russ Whitman, senior vice president at commodity researcher Urner Barry.

Wings have been doing so well in fact that Wingstop has started testing cheaper chicken thighs on its menu.

The thigh “has a lot of the characteristics of our existing bone-in chicken wings, and that they cook in about the same amount of time,” Wingstop CEO Charlie Morrison told analysts back in November, adding that thighs develop “that crispy skin, but the juiciness that you want.”

While other chains struggled last year due to the pandemic forcing them to shutter locations and layoff staff, Wingstop opened around 140 new stores in 2020, pushing its total footprint pas 1,500 nationwide. And demand shows no sign of slowing down. 

“Wings are just a hot item,” said BTIG analyst Peter Saleh. “It’s shareable, and it delivers well.”

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