Chipotle Shares Rally Massively: Anybody Remember BJ's Restaurants?

Chipotle Mexican Grill (NYSE: CMG  ) shares are once again in the spotlight after they rallied a massive 13.5% after the Denver-based burrito chain released other-worldly fourth-quarter 2013 results. The earnings beat completely annihilated consensus estimates, after same-store sales for the company jumped a dizzying 9.3% in the last quarter. At the current share price, Chipotle shares have gained a mind-numbing 79.8% in the last 12 months, compared to McDonald's (NYSE: MCD  ) 2.7% and Yum! Brands'  (NYSE: YUM  ) 6.6%.

Long-term investors should learn to focus on the long-term trends and avoid panicking about market volatility, unless of course this happens to be a result of serious underlying problems in a company. But still it pays to check whether Chipotle shares have a fair valuation in spite of the company's impressive growth or if they have run a little too far too fast.

Meanwhile, Starbucks (NASDAQ: SBUX  ) continues to light up the sector with great growth, while its shares remain decently valued despite having been on a tear for some time now.

BJ's Restaurants  (NASDAQ: BJRI  )  shares were once the darling of the masses who simply couldn't resist the allure of the company's endearing growth story and happily bid up the stock price to near-insane levels. The shares gained a massive 500% in a three-year period to trade at a stratospheric forward P/E of 56 in 2011. But then company sales started slowing down, and the shares took a nosedive that was much bigger than the decline in top-line growth. Although the company's sales revenue has improved by 30% over the last two years, the share price has slipped by more than 40% over the same period

When you compare Chipotle shares with those of other popular growth companies in the sector such as Buffalo Wild Wings, Starbucks, Dunkin' Brands Group, and Krispy Kreme Doughnuts, Chipotle's stock stands out conspicuously like the tallest kid in class.

The last time Chipotle shares were this expensive was back in 2007 when the company started trading in the bourse for the first time.

Chipotle in a class of its own
But let's cut Chipotle some slack and give credit where it is due. The company has about 1,540 store locations and a highly unusual pitch -- fresh fast food for both meat-eaters and vegans alike. There is no denying that the restaurant chain still has huge growth potential in the U.S. market, and its 14 restaurants located abroad are showing early signs of success too.

The company recorded notable 20.7% top-line growth in the last quarter, and this was achieved not through price hikes but rather increased store traffic, which is highly commendable. The company's restaurant-level operating margin improved 100 basis points to 25.6%.

For fiscal 2014, Chipotle expects to grow in the low- to mid-single digits and plans to open a good 200 stores across the U.S. Being the real pioneer of the popular fast-casual eatery theme, Chipotle has proven that it's still a hot-favorite among Americans. Still, a forward P/E ratio well in excess of 50 raises a red flag.

Are its peers a better bargain?
McDonald's might be the behemoth of the space, but it's getting walloped by upstarts such as Yum! Brands. The giant fast-food restaurant chain could only manage to chalk up 2% top-line growth in 2013 and modest 4% growth in its bottom line.

Those numbers might not be anything to write home about, but they're still better than Yum! Brands', whose profits plunged a jaw-dropping 68% in the third quarter of 2013. In spite of this setback, investors still think Yummy's Taco Bells, Pizza Hut, and KFC restaurants have much better future growth prospects than McDonald's built-out franchises.

What's even more worrying for McDonald's is the fact that the company's expected growth in 2014 is the lowest among its peers. Despite the shares trading at a 10.5% discount, they are not a very good bargain based on the company's ongoing weaknesses.

Starbucks is probably one of the best bargains in the space. The company delivered 5% same-store sales growth in the first quarter of fiscal 2014, with its bottom line rising by a huge 25% margin to $540.7 million, well ahead of consensus estimates of $526.8 million.

Although Wall Street was slightly disappointed by the lower revenue growth, it came on the backdrop of a stellar record of top-line growth in excess of 6% for 15 straight quarters prior to the latest earnings call. The coffee giant expects its overall revenue to grow in excess of 10% for the full year, same-store sales to increase in mid-single digits, and a significantly higher earnings per share. It also plans to open 1,500 new stores across the country.

Foolish bottom line
Although there are several other companies such as Amazon.com and Netflix that sport far higher valuations than Chipotle, these companies exist in the tech sector, where those kinds of exceptions are frequently made for high-growth companies. For Chipotle, however, the fast-food sector might be less forgiving, and the shares risk a sudden and huge downturn should the company miss investors' high expectations for growth in the near term.

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