Plenty More Flame Under Chipotle's Grill

Editor's note: A previous version of this article overstated the net income per employee for Chipotle. The Fool regrets the error.

There has been a lot of spicy talk lately about Chipotle's (NYSE: CMG  ) record-high stock price. Many say the stock is overvalued and due for a correction. But with continued strong growth prospects in both domestic and international markets, Chipotle is just getting going.

Room for more beef in the taco
Chipotle's growth in recent years has been meteoric, and there are good reasons to expect that this will only continue. The rate at which sales at Chipotle's existing stores grew -- known as comparable sales increase -- has risen impressively over the past three years, with steadier and stronger growth than McDonald's (NYSE: MCD  ) and Panera Bread (Nasdaq: PNRA  ) . Check out the table below for the specific numbers. Chipotle acknowledges that it will likely see a slowdown in 2012 due to overall economic factors, but the underlying, Chipotle-specific reasons for this growth (higher traffic, price increases) remain steady.





P/E 61.23 18.54 34.68
Comparable sales growth 2011 11.2% 5.6% 4.9%
Comparable sales growth 2010 9.4% 5.0% 7.5%
Comparable sales growth 2009 2.2% 3.8% 2.4%

Source: Companies' annual reports;

Note that Chipotle's comparable sales growth numbers come from company-operated restaurants only, as it does not franchise its restaurants. Panera's numbers represent just company-owned locations. McDonald's does not break out comparable sales growth figures for franchisees.

Chipotle's price-to-earnings ratio is well above those of McDonald's and Panera Bread. For further comparison, the industry average is currently about 25.8. Still, we should always put this number in context. Not only do we see robust, organic growth at Chipotle, but also marvelous efficiency. The company's net income per employee is orders of magnitude above the competition.

Plenty more notches in the belt
In pursuit of further expansion, Chipotle has begun to implement its "A Model" concept for new domestic restaurant openings. Chipotle's initial growth came from opening stores in dense, urban markets. While these markets are not yet saturated, the options for further such expansion are increasingly limited. Under the A Model strategy, Chipotle opens simpler, more streamlined restaurants in areas with attractive customer bases but less foot traffic. These restaurants are cheaper to build and maintain, and allow Chipotle access to broader areas.

But Chipotle is not resting on its lettuce-flavored laurels, and has introduced its promising ShopHouse concept. After all, Chipotle's business is not just burritos. Chipotle provides a great process that can be applied to various cuisines. ShopHouse extends Chipotle's concept to Southeast Asian food. The first ShopHouse restaurant opened in Washington, D.C., in 2011, and it has been wildly successful. The Washington Post's top food critic gave ShopHouse rave reviews, and customer comments on Yelp! are almost religiously fervent.

While Chipotle is coy about expansion plans, the ShopHouse concept elegantly solves one of Chipotle's problems: cannibalization. No, this is not a Soylent Green story. When Chipotle opens new stores in a market in which it already operates, it can erode sales for established stores. ShopHouse offers a wholly different cuisine, which should minimize this effect.

Internationally, Chipotle's two new London locations seem to be quite successful, and Londoners have embraced Chipotle's burritos. Chipotle does not break out revenue figures for individual stores, but online reviews and blogs across London are consistently favorable. (The company dryly says the stores are "making money and are accretive to company earnings.")

Chipotle has plans for a Paris opening as well, although it has been repeatedly delayed. This only seems to have heightened Parisians' enthusiasm, and there are entire blogs devoted to nothing more than speculation and rabid anticipation of the opening date.

Further east, Chipotle is looking for sites in Munich, which I predict would be a brilliant move. In my experience, there is no good Mexican food in the entirety of Europe, so Chipotle doesn't have much of a bar to clear.

Where the fat could get trimmed
That which is "sustainable" and "natural" in the U.S. is just "the law" in Europe. For instance, many European jurisdictions already outlaw the use of rBGH (recombinant bovine growth hormone) in cattle and nontherapeutic antibiotic use in livestock operations, two of Chipotle's selling points in the U.S. market. This could erode brand differentiation in Europe unless Chipotle raises the bar. The flip side, of course, is that this considerably eases supply constraints. Meanwhile, the simple fact of providing decent Mexican food in the land of execrable Mexican food may be differentiation enough.

There is also the creeping opposition that Chipotle, despite its healthy-food cred, grossly overportions its burritos, thus making them less healthy meal choices. If consumer home in on this, they could change their tune about whether Chipotle's food lives up to its "Food With Integrity" mantra. Ultimately, though, if you consider Chipotle's international growth potential, coupled with its success abroad, and the fact that its model is highly efficient and doesn't require much tailoring for European requirements, I'd say it isn't overpriced at today's multiples.

Go for the whole enchilada
It's true, Chipotle is expensive. I'm going to buy shares anyway, and I've made an outperform call in Motley Fool CAPS. This company has every reason in the world to keep growing, and I don't want to miss out on that. To help it along, I plan to contribute substantively and frequently to the company's sales, because those burritos are just so delicious.

If you care to join me, consider washing down your tacos with a delicious free report. "3 American Companies Set to Dominate the World" includes analysis of McDonald's, one of Chipotle's competitors.

Fool contributor Sara E. Wright doesn't own shares in any of the companies mentioned in this article, but plans to run out and buy her some Chipotle as soon as trading rules allow. The Motley Fool owns shares of Panera Bread and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Panera Bread, McDonald's, and Chipotle Mexican Grill, and have recommended creating a bear put spread position in Chipotle Mexican Grill. 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 (7) | Recommend This Article (10)

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 March 22, 2012, at 2:15 PM, AndreWilliamson wrote:

    I'm pretty sure that the $85k net income per Chipotle employee is not correct. With ~$200m in net income, that implies each Chipotle location has 2.2 employees.

    Net income is in the $180k-$200k per store ballpark. At 15 employees per store (wild guess), that would be about $12k net income per employee. This is all back-of-the-brain calculation, but probably close.

  • Report this Comment On March 22, 2012, at 2:51 PM, JackShephard wrote:

    The fundamentals for Chipotle do look good

  • Report this Comment On March 22, 2012, at 11:29 PM, wildbill40 wrote:

    I think the key takeaway from the article is at the end:

    The Motley Fool owns shares of Panera Bread and Chipotle Mexican Grill.

  • Report this Comment On March 23, 2012, at 8:48 AM, bubbler101 wrote:

    this article seems like a pure pump, anyone who would tout a stock at this level, in this market, with the valuations of this, reminds me of goldmans 600 call on amazon at the height of the tech bubble, Motley fool, I used to think you were one fo the reliable sources. no more. cmg is a buy at about half the current value.

  • Report this Comment On March 24, 2012, at 2:04 PM, rjhodges wrote:

    I'd really like to know how this article can remain live. The error included in its original posting was so blatant, glaring and obvious that it makes anyone wonder if Sara E. Wright has any concept of what she is writing OR is there any quality control going on anymore at the Or has posting on become yet another tool for pumping overvalued momentum stocks.

    To originally present that CMG generates $85k per employee vs. $13k per employee for MCD and to have that be the major tenet upon which her claim is based is a glaringly blatant example of Ms. Wright's complete lack of understanding of rational comp metrics. In actuality, CMG generates roughly net income of $6,900 per employee (half of MCD)... yet this article remains virtually untouched sans the removal of the net $ per employee section.

    I, and I'd venture hundreds of other readers, would greatly appreciate an explanation as to how an author/contributor to your site can make such an outrageous calculation, present that figure as a compelling reason to buy the stock, have that argument be okayed by an editor/filter and THEN when discovered the article remains posted without being supplemented to provide additional arguments as to why CMG is a smart investment trading at 65x earnings or 3x growth.

    Further, I'd challenge Sara to present us Fool readers with 3... no make it 2 - heck ONE, present to us just ONE metric which suggests CMG isn't 100-200% overvalued at $415.51 a share. It simply can't be done. Please prove me wrong.


    RJ Hodges

  • Report this Comment On March 25, 2012, at 2:01 PM, nickolassc wrote:

    It's disgusting that you could pump CMG garbage when by all valuations it is at least 2x overvalued and is in all likelyhood nearing the top of it's spectacular run from 340 a share. JACK, which owns Qdoba, is a much smarter play if you are looking to add a taco stand to your portfolio. Fool, you used to be about value, what happened?

  • Report this Comment On April 27, 2012, at 3:31 PM, IlluminatInvest wrote:

    Good call, nickolassc, since if Qdoba was valued the same as Chipotle on a price to sales basis it would be worth more than the entire market cap of its parent company JACK.

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