Does Chipotle Look Appetizing?

Last qtr I said “Chipotle (CMG) just jumped when it should have dropped”. Well this qtr the stock did drop — as it should have — so let’s take a look at CMG and see if this is a good time to get in.

One Year Chart

Last qtr CMG had 11% profit growth on a 12% increase in sales.  Same store sales growth  — a leading indicator for restaurant stock prices — were sizzling a year ago and have now been slow for two straight qtrs:

• 2013 Q4 9.3%
• 2014 Q1 13.4%
• 2014 Q2 17.3%
• 2014 Q3 19.8%
• 2014 Q4 16.1%
• 2015 Q1 10.4%
• 2015 Q2 4.3%
• 2015 Q3 2.6%

At $750 the stock was selling for 43x earnings. That was OK when profit growth was 27%, but not when its 11% as it is now. Still — even after the drop — the stock sells for 32x earnings even though the Estimated Long-Term Growth rate is 21%.

Fair Value

I used to thing slowing growth would take Chipotle’s P/E down to 25. But don’t bet on that happening anytime soon (I bet on it years ago and sold the stock in the $200s I think).

Now my guess is 28x earnings is fair for this company. Profit growth is set to average 17% a qtr the next 4 qtrs and CMG has missed estimates by two/three cents the last couple qtrs. Annual Profit Estimates have also ticked down a bit during that time. This isn’t a rapid grower anymore, but it’s still growing. The chain consists of around 2000 locations now and the company is adding 215 to 225 this year and 220 to 235 next year (Source: Barron’s).

Sharek’s Take

Chipotle is a great core holding for growth investors, and the valuation has come down a bit to make the stock more enticing. But the shares are just a little too-high to buy and we should continue to wait for this stock to get just a little more appetizing. Really another $100 drop to $550 would be nice, but I would settle for $575 which is CMG’s 2016 Fair Value. If you own the stock already, hang onto it for years to come.