Chipotle's Burritos, Stock Win New Fans

BOSTON (TheStreet) -- Chipotle Mexican Grill(CMG) opened 25 new restaurants last quarter, and comparable-store sales, a measure of growth for existing locations, increased 8.7%. The Chipotle brand continues to win new customers, even in established regions.

Unlike competitors, the company forgoes a franchise model, allowing management a greater degree of control over ingredients and brand. Chipotle makes a concerted effort to avoid factory-farmed protein. Its pork, chicken and beef come from so-called naturally raised animals, which are treated humanely and never given antibiotics. Only 35% of Chipotle's dairy products come from pasture-raised cows, but a prodding of suppliers is boosting that figure.

Founder Steve Ells, a graduate of the Culinary Institute of New York, is the root of the company's social responsibility. After working as a line cook in San Francisco, he opened the first store in Denver with an $80,000 loan from his father.

The original Chipotle is situated in a former Dolly Madison Ice Cream Store. Ells, a chef, not a businessman, projected that 107 burritos a day was the break-even point for his fledgling enterprise. Within two months of operation, the restaurant was selling more than 1,000 a day and generating enough cash for a profitable expansion. The company was seeded by McDonald's(MCD) in 1998, allowing rapid development. McDonald's divested its position in 2006 after Chipotle went public. Chipotle's stock doubled on the first day of trading.

Video: 'Mad Money' Recap: Chipotle

Most remarkable about Chipotle is its mission of quality: Although its ascent has been rapid, its commitment to taste and ethics has cultivated a rabid fan and investor base. Decisions to embrace high-quality ingredients and to shirk the franchise model are examples of this commitment, but so is its method of expansion. While many companies are cavalier with debt as they grow, Chipotle has rewarded shareholders by adroitly using cash. It holds $307 million of liquid instruments, equaling a quick ratio of 3.1, and just $3 million of debt.

Chipotle's return on equity, a key measure of profitability for investors, expanded from 15% to 20% during the second quarter, beating the industry average of 10% and the S&P 500 average of 12%. Return on assets, a measure of internal investment success, climbed from 11% to 15%. The impressive metrics command a premium. Chipotle shares sell for an expensive price-to-book ratio of 6.1 and a lofty price-to-cash-flow ratio of 17.

Chipotle's second-quarter results, released July 22, beat consensus expectations -- it beats profit expectations, on average, by a margin of 26%, so outperformance is standard fare. The company has increased net income 40% a year, on average, since 2007.