I sold Chipotle Mexican Grill (CMG) in February 2013 when the P/E was 32. I felt the P/E was too high for a company with the ability to grow 20% to 25% a year. Then in August 2013 I said the stock was Big as a Burrito when the P/E was 38. Last quarter the P/E got up to 42. This stock has been defying gravity for a year now, and although at first glance it seems like the stock is ripe for a fall, there’s good profit growth coming later this year that will likely keep the stock at these lofty levels.
One Year Chart
I sold the stock a year ago? Ugg. But I was concerned with the 8% expected profit growth (CMG beat the street and had 10% profit growth. Didn’t slow the stock down). The company did put out 30% growth last quarter, but it only beat by 2 cents. Estimates are for teens profit growth the next two quarters, and since Chipotle hasn’t beaten by a wide margin since 4QtrsAgo I feel it will be tough to get past 20% growth.
But looking out three and four quarters from now, profit growth is expected to accelerate to 28% and 31%. This can be seen in the Earnings Table. If I look further out, 31% and 27% profit growth is expected five and six quarters from now. Since CMG seems to always sell at a premium, these numbers might give CMG enough fuel to keep its lofty 43 P/E.
Fair Value
Still, when we come back to reality, the 43 P/E is tough to keep for the long run (unless you’re growing 35% a year).
Sharek’s Take
I have to think this CMG will eventually come down until it attains a more reasonable P/E. High P/Es don’t stay forever, a good example of this is Starbucks (SBUX) in 2006. Often that year the stock sold for $37 which was 52 times what the company would make in 2006. Then that Fall SBUX stock peaked, headed lower, and eventually got as low as $7 in 2009 — even though profits kept growing at a healthy clip. SBUX stock just couldn’t hold up with a high P/E, and someday CMG will buckle under this weight as well. Sure, good growth is coming, but this stock needs the good growth to keep this stock price.
View the Earnings Table here. View the Profit History here.View the Ten Year Chart here.
