Chipotle Mexican Grill, Inc. Baffles Wall Street, but This Growth Story Is Just Beginning

Despite Chipotle's phenomenal past decade, the next 10 years could be more lucrative for investors.

Feb 2, 2014 at 12:00PM
Image Of Chipotle Sign

For all the simplicity of its restaurant business, Chipotle Mexican Grill (NYSE:CMG) continues to baffle some Wall Street analysts. On one hand, the growth figures just don't seem to make sense. On the other, analysts have missed the boat so often with Chipotle that it's success is almost unbearable. At some point, the burrito has to burst, right?

Commentary from the boutique investment bank Wedbush serves as the latest example of Wall Street's bewilderment over the burrito maker. On Jan. 24, Wedbush downgraded Chipotle's shares while predicting that same-store sales growth would trend toward a consensus of 6.7%. A week later, Chipotle reported a 9.3% increase in same store sales, topping Wedbush's expectations by 38%.

Wedbush also estimated revenue of $820 million and maintained a price target of $510 per share. Needless to say, Chipotle posted revenue of $844.1 on Friday, reflecting 20.7% revenue growth, and shares subsequently soared to $550.

It was a scorching-hot quarter, by all accounts, especially since the fast-casual chain is averaging 20% revenue and 30% earnings growth year over year even after two decades in operation.

Chipotle's management team continues to run its restaurants like clockwork, while more than one Wall Street shop remains anchored on an outdated approach to evaluating its business model.

Following Chipotle's earnings, analysts at the investment bank Raymond James fessed up to their prior blunders:

We continue to be wrong-footed by waiting for a maturation of [Chipotle] per-unit sales, which we would expect to create a lower-risk reentry point for investors. Instead, the chain continues to produce industry-leading comp sales growth despite its significant size.

Yet in spite of another spectacular quarter, the team of analysts still refused to change their position on Chipotle's shares:

However given overall sluggish restaurant demand trends, we cannot bring ourselves to recommend chasing the stock, so we reiterate our Market Perform rating. ... [W]e also expect to see comp trends normalize in the 3-5% range over the next few years. This should eventually push the stock's P/E ratio closer to its long-term EPS growth rate of 18-20%.

From Raymond James' perspective, buyers at these levels would be merely "chasing" shares with limited upside potential. The problem with this analysis, in my opinion, is that Chipotle very rarely -- if ever -- looks "cheap" by traditional measures like price-to-earnings ratios.

Furthermore, investors who hold out for the "perfect" buy-in price could wind up on the sidelines watching a tremendous company outperform year after year. As The Motley Fool's co-founder David Gardner describes, investors who put a mental blockade between themselves and excellent companies often miss out on multibagger stocks:

Too often, we as people think looking backward. We're experts at now seeing what's happened. If something's happened well, and we didn't do it, we kick ourselves. And at that point we conclude, "It's over; I blew it."

And I see that all the time in investing. And I do it myself, too, so I know why we do that, and that we do do it. One of the best things you can do is get rid of that instinct and realize it's not about what already happened. ...

For every stock -- any winner ... or loser ... that's all irrelevant now. It's actually what happens next. And that's where excellence usually stays excellent. And so you're usually rewarded -- even now -- for buying (NASDAQ:AMZN) if you've never bought Amazon. For owning some Amazon starting today, you didn't miss it. You haven't missed it any of the last 15 years with that stock or many other great accompanies.

The truly great companies, like the e-tailing behemoth Amazon, persevere. And they tend to pay back early investors beyond belief, even when they might appear "expensive."

For those who recognized Chipotle's near-perfect restaurant recipe early on, this excellent company has turned into a 10-bagger stock over the past five years. For those sitting on the sidelines, there's no reason to believe Chipotle's future won't be equally satisfying for shareholders.

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Isaac Pino, CPA, owns shares of Chipotle Mexican Grill. The Motley Fool recommends and owns shares of and Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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