At $550, Could Chipotle Mexican Grill Look Cheap?

Chipotle Mexican Grill (CMG 2.41%) cooked up an outstanding quarter to end 2013, by nearly every measure. Words like "blowout" and "soaring" were used to describe the burrito maker's results and subsequent 12% stock increase.

But as some of my colleagues and several Wall Street analysts have pointed out, this is no time for investors to buy into the original gangster of fast-casual food. Or is it?

As my experience with the stock proves, there's more than one reason to believe Chipotle's shares are attractive even at an all-time high.

Chipotle in Manhattan. Source: Chipotle Mexican Grill.

Backtracking on the burrito maker
In late 2011, I dissected Chipotle's business model and stock price with a paring knife in an attempt to understand the restaurant chain's tremendous growth story. At the time, shares of Chipotle were up 700 percent in three years, commanding a price greater than 50 times trailing earnings and cash flow. Both metrics seemed beyond belief for a brick-and-mortar business, especially according to pundits.

The emerging opinion was that this restaurant had little room to run. In the financial media, we heard stories about similarly lofty valuations reached by restaurants like McDonald's in the late 1990s or even the earlier, much-hyped Boston Chicken, which flew quite high before crashing back to earth. Surely, Chipotle's growth, especially without the leverage of a franchising model, would subside.

After conducting substantial research on this founder-led restaurant chain, I became enamored with the management team, the restaurant economics, and the growth potential in the fast-casual market. Nevertheless, I ultimately agreed with the naysayers in my article titled, "Chipotle: Buy the Steak, Not the Sizzle."

I homed in on one key metric: price-to-cash flow. As any analyst worth his salsa will say, this is a true gauge of what an investor pays for in a business. Chipotle's, at the time, towered over six of its peers, clocking in at 54.4 versus an average of 23.2, a premium of 136%. The value investor in me (whose voice is fading over time) just couldn't swallow such a pricey burrito. From my perspective, any less-than-perfect quarter from Chipotle would "result in heartburn for investors" down the road.

How Chipotle fared 
Sure enough, Chipotle did falter in 2012, temporarily, and the stock dipped in large part due to a short call and presentation by value investor David Einhorn. As a result, several buying opportunities presented themselves along the way. Those who bought on the "Einhorn dip" have witnessed returns of 120 percent, yet Einhorn's short position remains intact as of last November.

Needless to say, how did my thesis fare? Despite the fact that Chipotle seemed "priced to perfection" by all accounts, the company's stock has risen by 74% since I published my take in November 2011. Had I bought shares and held, I would have beaten the S&P 500 by 29% and the Dow Jones Industrial Average by a whopping 43%.

What's more, I might have been more inclined to pick up shares on the dips if I still believed in the long-term prospects of the company. All of these actions could have added up to a nice market-beating annual return from a tremendously well-run company.

Alas, the shares were just too expensive, like Chipotle looks just too expensive today.

But let's delve into the numbers for a moment. Back then, Chipotle's average same-store sales growth for the prior three years was 7.6%. After the recent year-end results, Chipotle's updated three-year average is higher, at 8.1%.

Restaurant growth, meanwhile, clocked in at 14% from 2009 through 2011. In the last three years, that number's stayed right on par, at 14%.

Source: Chipotle investor relations and SEC quarterly and annual filings. 

By these measures, Chipotle's momentum has yet to slow, even though some analysts believe there's a ceiling limiting the chain's growth. On the contrary, I would argue that the future looks even more promising today than it did a few years ago.

Why Chipotle's future looks spicy
In 2011, Chipotle was a one-trick pony, almost entirely focused on serving Mexican fare to the American market. Today, Chipotle's well on its way to becoming a fast-casual restaurant empire, with 16 international locations and budding concepts in Asian cuisine and Neapolitan pizza through ShopHouse and Pizzeria Locale. Yes, the store counts for the latter two are small, but the rate of restaurant openings should exceed that of Chipotle's in the early days. As co-CEO Steve Ells pointed out on the conference call:

When we are ready to expand at a faster rate, we certainly have the infrastructure in place ... [W]e have so much information on 1,600 specific sites now in the U.S. with Chipotles, and so we know exactly what regions, what markets, what intersections we would want to go to with these new concepts.

The runway for each concept could be just as long as Chipotle's, but the company can accelerate along it at a faster pace.

And meanwhile, Chipotle's not finished capitalizing on its existing set of restaurants. The new catering business is driving additional foot traffic and there's reason to believe that the company has a breakfast menu in the works. Both opportunities require less up-front investment than new restaurants and could thereby translate to even faster earnings growth.

At first blush, Chipotle's shares look pricey today, similar to 2011. Still, the following chart shows that the stock is trading slightly cheaper in terms of price-to-cash flow than it was when I penned my first article.

A closer look at Chipotle's recent results provides perspective for those who simply write off the stock as "overvalued." Personally, I think the company will continue to outperform the market -- our ultimate goal as investors -- in the years to come.

Does it look cheap? Perhaps not by traditional measures, but winning companies tend to keep on winning. Plus, there's plenty of "optionality" for the company to grow the top line through a variety of new concepts. At this point, who am I to doubt a company that's grown revenue at an average rate of 30% over the past decade?

Instead of waiting for the line to die down or Chipotle's price to decline, perhaps investors should step up and take a bite of the burrito.