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JJ Kinahan: Forget Chipotle, Buy McDonald’s

In the wake of less than stellar earnings from Chipotle pro trader JJ Kinahan thinks investors should look elsewhere in the space.

I’m a buyer of McDonald’s , he says. It’s a better run company.

After the close Chipotle reported a quarterly profit that missed Wall Street's view as margins were hurt by higher food prices and legal costs related to a federal probe of illegal immigrant hiring.

Looking at the numbers, restaurant operating margins were 25.8 percent in the quarter, down 110 basis points from a year ago due to food cost inflation, Chipotle said.

General and administrative costs were 7.3 percent of revenue, up 80 basis points from the year earlier. Chipotle said the increase was due to higher non-cash stock-based compensation and higher legal costs.

Chipotle, which warned in May that legal costs connected to government investigations of its hiring of illegal immigrants were rising, said on Tuesday these costs were hurting its margins.

”But in a survey Chipotle customers indicated they were most willing to pay higher prices,” adds trader Mike Khouw. “I think they have the ability to raise prices,” he says. Khouw adds that he’s not surprised by the after hours pullback but doesn’t think it’s anything more than a pull back.

Also, in April, the company revealed that the criminal division of the U.S. Attorney's office for Washington, D.C., had opened an investigation and asked it to turn over documents related to U.S. Immigration and Customs Enforcement audits.

In the wake of ICE audits in Minnesota, Virginia and Washington, D.C., Chipotle has fired roughly 500 undocumented workers.

Buy McDonald's on CMG Dip?

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