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Is Inflation Deflating Chipotle?

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Chipotle Mexican Grill (NYSE: CMG  ) might have to lay off the guacamole a little bit. Although its second-quarter profit rose, the figure missed analysts' expectations. Rising food costs and legal fees took a bite out of Chipotle's burrito. Should investors pass on this spicy stock?

Second-quarter net income increased 9%, to $50.7 million, or $1.59 per share. More hearteningly, Chipotle's second-quarter sales surged 22.4%, to $571.6 million, and same-store sales skyrocketed by 10%.

Unfortunately, the high price of foodstuffs forced Chipotle to skimp on the prices. Its restaurant-level operating margin plunged 110 basis points to 25.8%.

As a result, Chipotle missed analysts' estimates by $0.09 per share. Legal expenses related to a federal probe into the company's hiring of illegal immigrants also dragged down Chipotle's bottom line.

As far as other drags go, rising food prices and a difficult consumer climate will hurt plenty of restaurants besides Chipotle. For example, higher beef costs this year could seriously squeeze weakened stocks like Ruth's Hospitality (Nasdaq: RUTH  ) . I wouldn't want to touch middle-of-the-road, uninspiring restaurant companies like Ruby Tuesday (NYSE: RT  ) in this environment, either. What about Wendy's (NYSE: WEN  ) , which has been suffering at the hands of stronger competition like McDonald's (NYSE: MCD  ) and recently had to shed the Arby's part of its business? I'll pass.

In short, investors should cut Chipotle a break for its profit miss, given its robust sales and comps figures. Customer traffic isn't Chipotle's problem, even though fewer people have the disposable cash to eat out. That says a lot.

Still, potential investors craving a bite of Chipotle shares probably wish the stock had sold off far more significantly than it has today. After all, it would be nice to get this high-quality stock at a cheaper price than a whopping 54 times earnings.

Alyce Lomax does not own shares of any of the companies mentioned. The Motley Fool owns shares of Chipotle. Motley Fool newsletter services have recommended buying shares of McDonald's and Chipotle, and creating a iron condor position in Chipotle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2011, at 3:36 PM, ikkyu2 wrote:

    Market totally shrugged this off, knowing that the story of CMG is future growth into unpenetrated markets, not this quarter's earnings release.

  • Report this Comment On June 04, 2012, at 8:20 AM, StopPrintinMoney wrote:

    PE is 54 !!! The sound you're hearing is not the inflation eating this particular stock, it's the deflation of the bubble.

  • Report this Comment On July 20, 2012, at 7:39 PM, TrojanFan wrote:

    Agreed, this stock is way overvalued and portfolio managers the world over are looking for holdings to sell to raise liquidity for probable redemption once the European credit crisis starts spinning out of control again and infecting the rest of the world.

    Spain was very much on the market's mind today and I recommend that fellow Fools keep a closing tuned eye on Sicily. There are murmurs swirling around of a potential local government default by the Italian island region which the financial strapped federal government of Italy would be looked to in order to backstop.

    That could send Italian bond spreads spiraling higher once more and that will be a serious problem for global capital markets. Italy has the largest bond market of any mainland European nation and it is widely held all over the world. Their debt to GDP is enormous and will get much bigger if they have to bailout out the Sicilian government for their financial misadventures.

    How does this relate to Chipotle you may ask? Because this is a high flying stock with an enormous multiple and if Italy gets engulfed in the sovereign crisis in a manner similar to what Greece went through then risk premia will be going up all over the world in unison regardless of what industry any company operates in or where it's domiciled. Growth stocks with high multiples like this one will catch the biggest brunt of that.

    Not to mention, PMs are likely to sell their winners first and take their gains while they have them in order to meet client redemption and this stock is right at the front of that line.

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