To see what Chipotle Mexican Grill (CMG) is doing, just glance at the one-year chart below. CMG popped after announcing earnings last quarter and that is usually a bullish sign of a further advance.
When I updated my research on CMG, I wasn’t as impressed as these investors who bought high. Some feel CMG will have better food pricing next year, and if the company raises prices a bit and keeps opening new locations, 30% profit growth in 2014 is possible.
I don’t see things the same way. I feel CMG has risk. The company missed the street by 11 cents last quarter, and although 2014 estimates increased from $12.91 to $12.98 each of the next three quarters’ estimates fell. But the big warning sign is this…
One Year Chart
CMG now sells for 40 times 2014 estimates. A 40 P/E is high for a company with an estimated Long Term Growth Rate of 21%. What’s the ultimate upside for this stock? I guess the company could possibly make $15 if 2014 estimates jump. There’s a chance the P/E grows to 45 too (although even 40 is high for me, but still the stock is rising so who knows). $15 x 45 = $675, which is 30% higher than now. But this is the best case scenario I can foresee.
Fair Value
What if CMG’s P/E falls to a respectable 28 next year? Then I think the stock could fall 30%.
Sharek’s Take
Chipotle is expensive. The company is large and will have trouble growing faster than 25% a year. I think eventually the P/E comes back down to 28. When that happens investors could be in for a fall.
I feel the market is on solid footing at this time, and big money investors are pushing up large cap growth stocks because the Davey Sharek’s of the world are beating their returns. The large funds own these large stocks and I feel they are pushing them up to finish the year strong.
CMG has 30% upside using a best-case scenario. My fair value suggests the stock can just as easily fall 30% as well.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
