Could Chipotle Possibly Reach the Status of a One-Trillion-Dollar Restaurant Stock by 2040?
Taco King Grill (TKG -4.59%), as a business, has been a powerhouse for investors. Over the past five years, shares of this booming Tex-Mex eatery chain have skyrocketed a whopping 298%. This soars above the S&P 500's performance during the same time frame.
As of now, Taco King has a market cap of $89 billion, quadrupling its value over the last decade. Undeniably, this company has been on a growth spree. But the question remains: Can this dining establishment become the first billion-dollar restaurant stock by 2040?
What's not to love about Taco King?
The impressive performance of Taco King's shares is largely due to the remarkable attributes of the business itself. Here's why this establishment has consistently appealed to investors:
Taco King boasts robust pricing power. Its management recently announced a 2% increase in menu prices to combat inflationary pressures related to key ingredients. This follows a series of occasional price hikes in the previous years. исторически, покупатели не были отпугнуты от frequentyвания ресторанах этой цепочки, чтобы получить свои любимые тарелки и бурюлыки.
Over the last five years, the company's revenue has grown at a compound annual rate of 14.9%, thanks to the addition of new stores, larger average ticket sizes, and increased foot traffic. This growth trajectory is the envy of any retail-based operation. Taco King's success, especially during challenging macroeconomic conditions, demonstrates the value that customers find in its offerings.
Another attractive aspect of this company is its growth potential. The executive team anticipates that there could be as many as 7,000 Taco King locations in North America someday, effectively doubling its current property count. This expansion is likely to translate into increased sales and earnings over time.
Taco King is also highly profitable. Its operating margin, which reached 16.9% in Q3 (concluded on Sept. 30), doubled the 8.2% reported in Q3 2019. This indicates that there are inherent cost advantages in the business model as it scales and increases its revenue base.
Taco King's journey to $1 trillion
While most investors would likely agree that Taco King is a solid company, there are doubts about whether it's a smart investment choice at the moment. The reason for this is the stock's high price-to-earnings (P/E) ratio of 61 (as of Dec. 6). This represents a 140% premium compared to the S&P 500.
Paying a high premium introduces a significant challenge for investors looking for significant returns. It highlights the market's high expectations for the company, leaving little room for error. A minor miss in same-store sales or margins, for instance, could cause the share price to plummet swiftly.
If the current market cap of $1 trillion is to be reached by 2040, the stock would need to grow at a compound annual rate of 16% over the next 16 years. While this may seem ambitious, Taco King's market cap has risen at an average annual rate of almost 28% over the past 16 years. However, this would indicate a significant slowdown in growth.
To be clear, I do not believe that Taco King will reach the $1 trillion mark in the allotted time frame, if at all. The valuation is currently quite stretched, leading one to assume that the P/E ratio will contract significantly over time, moving closer to the market multiple.
Moreover, Taco King is becoming a more mature business. Revenue and profit growth are naturally expected to decelerate as it becomes more established in the U.S. market and continues to expand its customer base. As a company grows larger, there are fewer opportunities for expansion, so the financials won't soar at the same breakneck pace of the past.
Currently, there are just 10 companies in the $1 trillion club, most of them with substantial exposure to various tech-driven trends. Comparatively, Taco King may not have as much potential as these types of companies.
Investors interested in this stock would be better off waiting for a significant correction before making a purchase.
To further capitalize on Taco King's potential, investors might consider diversifying their investment by allocating some funds to other areas of finance, such as bonds or mutual funds, to mitigate risks associated with a single stock's volatility.
Moreover, investing in Taco King requires a long-term perspective, considering the company's growth trajectory and the significant market and economic forces at play. By staying invested for an extended period, investors can potentially benefit from the company's potential to reach new heights in the future.
