This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Short Sighted Stock Spinoffs

Stocks in this article: MCD CMG MHS MRK BKS GME MS DFS KMX

5. McDonalds 2006 Chipotle Spin

In 1998, as the U.S. fast food pioneer McDonald's (MCD) was rolling out Chicken McGrill and Crispy Chicken sandwiches to complement its burger supremacy, the company made a bold diversification into new foods by taking a minority stake in a popular Denver-based taco's and burrito's chain called Chipotle Mexican Grill (CMG).

By 2001, McDonald's had a controlling interest in Chipotle Mexican Grill and was investing heavily in its U.S. growth. In Sept. 2005, after a more than thirty-fold store expansion, newly minted McDonald's Chief Executive Jim Skinner decided to spin Chipotle Mexican Grill, preferring to focus on customer and profit growth at McDonald's, which celebrated its 50th anniversary earlier that year. In the IPO of over 20% of its stake in Chipotle on Jan. 25, McDonald's raised $173.4 million, pricing the stock at $22 a share, according to Thomson Financial.

"Since we made our initial investment in 1998, Chipotle has grown from 16 restaurants in the Denver area to a strong and popular restaurant concept with more than 500 locations throughout the U.S.," said Skinner of the rationale to spin Chipotle.

As CEO, Skinner decided that wrenching out comparable store sales growth would be key to growing the then struggling McDonald's business, which was suffering an image problem from Morgan Spurlock's Super Size Me documentary on fast food. "Just 1 percent growth in McDonald's global comparable sales translates to approximately $100 million in additional operating profit for the company and a substantial cash flow increase for all of our McDonald's owner/operators," said Skinner.

When Chipotle stock hit markets the next day, investors bought relentlessly into the company's growth prospects, more than doubling shares to over $44 and leading to one of the biggest IPO rallies since just after the burst of the dotcom bubble in 2001.

At the time, Chipotle had opened roughly 500 stores and had $627 million in annual sales and $37.7 million in profit. In a follow-on offering that May, McDonald's sold an additional $250 million worth of shares priced at over $60 and arranged a tax-free share exchange to fully divest its stake later that October.

McDonald's and Chipotle shares have both soared since the spin as the companies followed different growth trajectories and were able to successfully navigate the financial crisis.

After opening its first store in China in 1990 and bringing drive through to the region in 2005, McDonald's opened its 1000th store in the fast growing region in 2008. Its overall sales have grown nearly 30% to $27 billion since 2006, while profits have grown nearly 60% on a near doubling of revenue in the Asia Pacific, Middle East and African regions, proving many doubters wrong. Meanwhile, Chipotle more than doubled its stores in the U.S. and Canada, growing sales by over 175% and profits by over 400% to a forecasted $2.3 billion in sales and $216 million in 2011 profits, respectively, according to consensus estimates compiled by Bloomberg.

For stock investors there's been a clear winner among the two, however. While McDonald's shares have risen 175% since spinning Chipotle, it's paled in comparison to Chipotle's share gains of 767%.

Content on this page requires a newer version of Adobe Flash Player.

Get Adobe Flash player





While both companies have fared well since the spin, making it an exemplar of the belief that freed assets can create growth all around, Chipotle would rival emerging markets as McDonald's fastest growing business, potentially lifting shares significantly above their already near record-high levels.

For more on McDonalds and Chipotle shares see TheStreet ratings portfolio of top rated restaurant stocks.

2 of 6

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs