Chipotle Mexican Grill, Inc. Is on a Roll, But the Stock Is Still Too Pricey

Chipotle Mexican Grill, Inc. has plenty of growth ahead of it, but that doesn't justify buying the stock.

Feb 4, 2014 at 11:10PM

Chipotle Mexican Grill (NYSE:CMG) turned in a stellar performance in Q4, recovering from a weak start to 2013. Total revenue increased more than 20% for the quarter and 17.7% for the full year. Meanwhile, comparable restaurant sales rose 9.3% last quarter and 5.6% for all of 2013.


2013 was another good year for Chipotle.

I love Chipotle. The food is tasty, and I also appreciate the company's commitment to sourcing ingredients responsibly and giving its best employees plenty of opportunities to move up the management ranks.

However, I don't like Chipotle stock very much; it's even pricier than the food! While the company has plenty of growth left, there are other investment opportunities with similar growth potential at much more attractive prices.

Chipotle remains popular
Chipotle's Q4 comparable restaurant sales growth was the company's strongest result since Q1 of 2012. In some ways it was even better, because menu price increases contributed to Chipotle's sales growth in late 2011 and early 2012, whereas last quarter's gain was driven by higher traffic at its restaurants.

In light of the stronger-than-expected results, Chipotle's management raised their forecast for 2014 comparable restaurant sales growth. The company now projects a low- to mid-single-digit gain, excluding the effect of any menu price increase.

Additionally, Chipotle CFO Jack Hartung stated on the company's recent conference call that Chipotle is likely to raise menu prices during the third quarter. This will allow Chipotle to recoup the impact of commodity cost increases, which drove a slight decline in its restaurant-level operating margin last year. In other words, not only will a menu price increase boost sales growth further, but it will also push Chipotle's profit margin higher.

The price is the problem
Given that Chipotle has strong traffic and sales momentum entering 2014 and the company's margins could get a lift later this year from a menu price increase, what's not to like?

The answer is valuation. At this time last year, Chipotle stock traded for around $300, which seemed fairly attractive. By contrast, the stock has jumped to more than $540 and touched an all-time record high of $568.90 last week!

CMG Chart

Chipotle 5 Year Stock Chart, data by YCharts

At that price, investors are paying more than 50 times Chipotle's 2013 earnings. That's about 3 times the market average. To justify that price, Chipotle will need to deliver a stunning level of long-term earnings growth.

How fast can Chipotle grow?
Chipotle's recent results demonstrate that the company is far from saturating the market. However, it's hard to avoid the fact that growth is gradually tailing off. Chipotle added 180 net new restaurants in 2012 and 185 in 2013, and it is projecting 180 to 195 new restaurant openings in 2014. While the absolute number of store openings is similar, the growth rate in Chipotle's store count has slipped from around 15% in 2012 to a projected 11%-12% in 2014.

Chipotle may have trouble pushing its growth beyond the recent pace of just under 200 new restaurants annually. Unlike many of its competitors, Chipotle does not franchise. This allows it to offer a more consistent, high-quality experience, but it also creates organizational barriers to faster growth. (Think about it this way: if there are 250 working days in a year, Chipotle's development team is choosing a new restaurant site almost every day!)

Within each restaurant, opportunities for future sales growth are limited as well. Chipotle frequently has long lines at peak lunch and dinner times. This has led to a focus on "throughput" -- speeding up service times -- in recent years. The company has made good progress in this regard, setting a new record last quarter.

Still, there are physical limits to how quickly Chipotle can serve customers! Better practices may allow the company to increase peak-hour transactions by 10% or 20% over time, but these initiatives aren't going to double sales. Chipotle is now looking into mobile payment systems, which may speed up checkout times, but this isn't likely to be a panacea, either.

Foolish conclusion
I am confident in Chipotle's long-term prospects, and I think the company could easily grow sales at a 15% annual pace through the end of the decade. However, even that level of growth isn't enough to justify Chipotle's current valuation.

For example, Spirit Airlines (NASDAQ:SAVE) has been growing even faster than Chipotle in recent years and has equally good long-term growth prospects. Yet it is trading for less than 20 times 2013 earnings! Some of that difference is warranted by the riskiness of the airline industry, but the risk/reward trade-off for Spirit still seems much more enticing.

Long-term investors in Chipotle who buy today and hold for 10-20 years are unlikely to lose money, due to the company's consistent growth and large opportunity. That said, Chipotle's total return is still likely to trail that of the broader market due to its pricey valuation today.

A more compelling growth pick
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but also your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers