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Over the last six months, restaurateur Chipotle Mexican Grill (NYSE: CMG ) lost a quarter of its value primarily after a disappointing second-quarter earnings report that missed analyst expectations on the top line as well as revealing that same-store sales came in below estimates. The part that stuck most in the market's craw however, and sent Chipotle's shares tumbling 20% in one day, was the slowdown in customer traffic as consumers started reining in spending as summer started.
The issue was important because it wasn't the same for other casual dining chains. Panera Bread (Nasdaq: PNRA ) , for instance, didn't experience a similar pullback by its customers. Revenues and earnings beat Wall Street forecasts and it grew its traffic comp growth. Sure, it admits the economy is tough, but it's avoided the same pitfalls Chipotle is experiencing.
It was hard for investors not to get caught up in the spicy chain's promise. Over the past five years, Chipotle feasted on 22% compounded annual revenue growth, exceeding Panera's 17% pace. Smaller Cosi, on the other hand, saw a 3% contraction over the same time period. Even perennial favorite McDonald's (NYSE: MCD ) saw anemic increases in its growth rate over the year-ago period.
So can Chipotle find its growth groove again? Or did it ever really lose it? An argument can be made that it was the market that got ahead of itself with its expectations, not the restaurant, which actually posted a 21% increase in sales and a 61% jump in profits.
Chipotle Mexican Grill Snapshot
|Market Cap||$10.1 billion|
|Revenues, TTM||$2.5 billion|
|1-Yr. Stock Return||(0.6%)|
|Return on Investment||19.8%|
|Est. 5-Yr. EPS Growth||21.8%|
|Dividend & Yield||N/A|
|CAPS Rating (out of 5)||***|
Source: FinViz.com. TTM = trailing 12 months. N/A = not available; CMG does not pay a dividend.
The other issue weighing on Chipotle's results, aside from the internal numbers, was external forces that could make the rest of the year just as difficult. Investors feared that the blistering drought that burnt up the Midwest this summer would cause profits to take a hit from rising food costs. Not even Panera could escape that wall of worry, and along with Chipotle, Yum! Brands (NYSE: YUM ) , and Texas Roadhouse, it was included in the list of restaurant stocks that analysts downgraded.
As it turned out, though, the crops were salvaged. Corn yields per acre were expected to wither to their lowest level in 17 years, but while the crop was hurt, it wasn't nearly as bad as anticipated; farmers are now expected to harvest 10.727 billion bushels, "only" 13% less than a year ago. Prices are still elevated but remain below the levels forecast just last month.
Price is what you pay
It seems that the real risk to Chipotle, even more so than Panera or McDonald's, is that the market prices it like a growth stock instead of a steady earner. It still assigns it a multiple of 38 times its earnings and 29 times forecasts, and almost 80% more than its estimated growth rate. You'd have to look to Whole Foods Market (Nasdaq: WFM ) to see a similar comparison, though its stock has been hitting new highs regularly of late. With Chipotle's enterprise value at 42 times the free cash flow it generates, you can see the market is still anticipating exponential growth. Sure, it's always carried a premium, but in the current economy, expectations may need to be eased.
I'll be rating Chipotle to underperform the broad market indexes on Motley Fool CAPS, the 180,000-member-driven investor community where informed opinion is translated into stock ratings of one to five stars. The Mexican eatery has been rising in favor among members and now carries a mid-ground three-star rating in large part because 85% of the 3,140 members weighing in on the restaurateur think it will beat the Street.
Tell me in the comments section below whether you think Chipotle Mexican Grill can spice up its growth and regain its former lofty heights.
A sky-high opportunity
Whole Foods has proven to be the exception to the rule, and you can sign up for the Fool's special report on the company, which details how it's making a difference in the market. It comes with a year's worth of free updates, and gives you specific information about what's going right and what investors need to look out for. Fool readers can click here for your copy today.