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Momentum is Slowing — But Business is Strong

Stock (Symbol) Stock Price

Chipotle (CMG)

$146

Data is as of Expected to Report Sector

August 11, 2010

Oct 22

Retail & Restaurant

Company Description
Chipotle Mexican Grill, Inc. (Chipotle) develops and operates fast-casual, Mexican food restaurants in 35 states throughout the United States, the District of Columbia, and Ontario, Canada. As of December 31, 2009, the Company operated 956 restaurants. Chipotle’s restaurants serve a focused menu of tacos, burritos, salads and burrito bowls (a burrito without the tortilla). The Company manages its operations and restaurants based on five regions and has aggregated its operations to one segment. The Company categorizes its restaurants as either end caps (at the end of a line of retail outlets), in-lines (in a line of retail outlets), free standing or other. Of its restaurants in operation as of December 31, 2009, Chipotle had 198 free-standing units, 577 end-cap locations, 150 in-line locations and 31 other. The average restaurant size is about 2,600 square feet and seats about 55 people. Most of its restaurants also feature outdoor patio space.
Sharek’s Take
David SharekChipotle’s stock has had a solid run higher in 2010. Profit growth during the last four quarters has been solid if not spectacular. The restaurant is going through a period where same-store sales are rising and food costs are declining, so money is flowing to profits.Chipotle’s restaurant profit margin was 26.9% last quarter, a new record. Food costs fell 1/2 a percent and good same-store sales helped lower rent as a percentage of sales.Long-term investors should take a look at this stock, as CMG could compound at 20% a year. Chipotle is continuing to expand, and is now opening smaller restaurants which can fit into many more suburban locations. These smaller stores open up the market to a new set of opportunities — and cost less to build as well.
One-Year Chart
Although everything looks good with this company, the stock is selling around where it should be and I think CMG may have to take a breather. Notice in the one-year chart that CMG has a P/E of 29 and Estimates for the next two quarters show 19% and 18% profit growth is expected. I think the company will beat these estimates and come through with profit growth of around 30%, the upside is limited unless annual profit estimates jump higher.
Profit Growth Earnings Table
Chipotle’s sales growth accelerated from 16% two quarters ago to 20% last quarter. Profit growth has slowed from 90% to 53% and now 33% during the past three quarters. Although numbers are still solid, momentum is slowing.
Beat the Street
Notice CMG beat by 8 cents last quarter, but had beat by more than 20 cents in each of the prior three quarters. I think it the explosive profit growth phase may have to take a breather — the company will be going up against tough comparisons in coming quarters.
Annual Profit Estimates
Annual Profit Estimates increased, but not to the degree they had been jumping in past quarters. Once again I think momentum is slowing, but that’s not to say this isn’t a solid stock to own here.
Future Quarters
Quarterly estimates show high-teens growth ahead — and these estimates are increasing. From the trend, it seems CMG won’t have trouble continuing profit growth of 25%. CMG beat by 8 cents last quarter. If the company beats by 8 cents this quarter, that would work out to 26% profit growth (as long as CMG doesn’t issue or buy back shares of stock).
Fair Value
CMG is worth 30 times earnings, same as last quarter and up from 25 times earnings two quarter ago. Although momentum has slowed, I didn’t decrease my Fair Value P/E. Chipotle is currently trading around its fair value. Upside of 25% lies ahead for investors who wish to stick with the stock for a year. This is a very sound investment.
Year Profits x P/E = Price Upside/Downside
Today $5.10 x 29 = $146  
2010 Fair Value 5.10 x 30 = 153 5%
2011 Fair Value 6.07 x 30 = 182 25%
Ten-Year Chart
Chipotle’s ten-year chart shows the stock is hitting resistance around the $150 level. During the prior peak, the stock’s P/E was abnormally high. In January of 2008 the stock was around $150 and sold for 55 times the $2.72 which was expected for that year. When CMG only came through with $2.36 the stock took a beating as the P/E came down.In January of 2009 the stock opened the year at $62 as 2009 profits were supposed to be $2.52, making the P/E 25. CMG ended up making $3.95 that year and the stock closed 2009 at $88.
Power Ranking Bottom Line
Growth Portfolio

9 of 18

CMG is the 9th best stock in the 18 stock Growth Portfolio. The stock has a lot of “good” going on and the only issue I have is last quarter there was a lot of “great” going on.This stock is selling where it should be, and gives investors long-term potential of 20-25% a year. That’s a solid return for a buy-and-hold stock.
Aggressive Growth Portfolio

N/A

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