Chipotle Could Drop $150

Chipotle (CMG) just went for a dip after it reported earnings this month, but I see the stock dropping another $150 unless it raises prices soon.

What’s been fueling CMG’s growth of late is the restaurant’s amazing rate of same store sales (SSS) growth. Here’s the SSS figures for the past 5 qtrs:

• 2013 Q4 9.3%
• 2014 Q1 13.4%
• 2014 Q2 17.3%
• 2014 Q3 19.8%
• 2014 Q4 16.1%

Last qtr’s 16% increase came from a combination of +8% traffic, +6% price increases and +2% menu mix (ordering more or higher priced stuff). Management raised menu prices last April, and that coincides with the jump in SSS from 9% to 13% and then 17%. Around half of this SSS growth is due to that price increase (+9% for beef and +5% for chicken) and that’s what’s concerning me now. The price increase started in 2014 Q2 and unless management raises prices again, CMG will have tougher comparisons in the 2nd qtr of 2015 unless it hikes prices again. Also during the first 3 qtrs of 2013 SSS growth was 1%, 6%, 6% and 9%, so in 2014 there were easier comparisons to the year-ago period.

Management is considering raising prices in the 2nd half of this year, especially on meat as higher costs have reduced profitability in these items.

One Year Chart

Chipotle is expensive. It’s always expensive. And that probably won’t correct itself until the next bear market comes. High growth/high P/E stocks can keep the momentum going in good markets, but when the market heads down the P/E ratios often contract to more normal levels. I feel CMG’s normal P/E is 25, and the current 39 P/E is very high.

Also note the +8% profit growth came during 2014 Q1 — before the price increase. So NxtQtr’s est of 36% includes higher prices and goes the comparison a year-ago is with lower menu prices. So this qtr comparisons are easy, after that then become more difficult. Also note the 2QtrsOut est is 27%, so analysts assume slower growth ahead.

What’s not shown here is three and four qtrs out the estimates call for only 13% and 14% profit growth, as we compare higher prices vs. higher prices. So 39x earnings for teens growth would make the stock overvalued.

Fair Value

I feel the Fair Value on this stock is 30x earnings because I think this company will return to 25% profit growth, and that means the stock is $150 overvalued right now.

Is it a good stock to short? There’s risk in that as another price increase would probably help SSS as well as profits and that could be a catalyst to make the stock jump higher.

Sharek’s Take

Chipotle is currently overvalued by $150 as higher menu prices are boosting profits on a year-over-year basis. But those comparisons get tougher in April and management needs to boost menu prices again so it can keep the momentum going. Still, even if it does, I don’t envision a lot of upside from the current price.