Finding White Space
Chipotle's Mexican Grill went public last week. The stock shot up in price, and ended the week posting a whopping Price/Earnings multiple of 36! As you probably know, Chipotle's has been a subsidiary of McDonald's. Now, it is it's own company - albeit with most of the stock still owned by McDonald's.
McDonald's, meanwhile, has about an average market multiple of 17. Why is Chipotle's P/E roughly double McDonald's? Analyst views are mixed as to the exact future of the stock, but what all agree upon is that Chipotle's has a great growth path in front of it. While McDonald's is struggling to find opportunities to grow stores, Chipotle's is expected to expand at double digit rates for several years. And profit growth is expected to match.
Now that it's outside of McDonald's, Chipotle's has the opportunity to explore new opportunities for growth. It can expand in new ways, and develop new solutions. It has the opportunity to create, and sustain, White Space to prolong it's growth. And the result is a 2x market multiple.
Some would say this is a win/win. Chipotle wins, and McDonald's wins - because MCD shareholders keep ownership in Chipotle's. I would say that is a back-handed compliment. Why couldn't McDonald's use Chipotle's to attract new talent? Why couldn't McDonald's let Chipotle's manage White Space to create growth avenues while inside McDonald's? Why couldn't Chipotle's be a growth vehicle to help McDonald's provide new opportunities for not only employees, but suppliers and investors?
It's too bad that McDonald's is so Locked-in to its Success Formula that it had to resort to letting Chipotle's go outside. Yes, this is better than holding Chipotle's back. But, it would have been best if McDonald's would learn to Disrupt itself, create and manage White Space. That would insure McDonald's of a long and viable future. Now, the future growth at McDonald's remains clouded, while Chipotle's appears loaded with upside opportunity.