Why Chipotle's Stock Just Got Cheaper Than the "Next" Chipotle's

Price conscious investors are underestimating the value of Chipotle's comparable sales.

Apr 20, 2014 at 10:00AM

Gourmet burrito maker Chipotle (NYSE:CMG) has seen its stock soar to  unimaginable heights in the past five years, all while transforming the restaurant industry . Thanks to its success, Fast Casual IPO's from Noodles & Company (NASDAQ:NDLS) to Potbelly (NASDAQ:PBPB) have been sold to the market as "the next Chipotle."

Many investors have turned to those new "Chipotle's," because they feel they've already missed the real Chipotle's epic run. But, with same-store sales accelerating, this stock is still cheaper than its peers. 

 CMG Chart

CMG data by YCharts

Valuation: the original is cheaper
When was the last time the "next" anything was as good as the original. Think about it. 

Was Oasis as good as the Beatles? Was Vince Carter as good as Michael Jordan? No!

I ask that question somewhat tongue-in-cheek, but it's illustrative of how bankers have sold many restaurants to the public pre-IPO, hoping to ride Chipotle's coat-tails to success. I actually like both Noodles & Company, and Potbelly compared to most restaurants. I also think it's ridiculous to compare either restaurant to Chipotle, especially Potbelly, based solely on the fact that they are Fast Casual chains. 

But, the markets have insisted on doing just that. Further, most investors have moved toward other options because they feel they missed Chipotle. However, on a relative basis, Chipotle is still the cheapest of the bunch. 

CMG PE Ratio (Forward) Chart

CMG P/E Ratio (Forward) data by YCharts 

This point has been made more than a few times, but many investors still consider Chipotle pricey. This is because we too often value stocks by anchoring to prices we've seen them at previously, rather than relative to earnings or growth.

Chipotle reported earnings today, with growth of 8.5%, but that doesn't tell the whole story; revenues were up a staggering 24.4%. We already know that Chipotle is cheaper on a forward P/E basis, but it still wouldn't be cheaper than Noodles and Potbelly if it was growing slower. Since food costs will take a bite out of all three companies earnings, revenues are a better measure of growth, as the chart below shows Chipotle is growing faster. So why does it trade at a discount?  

CMG Revenue (Quarterly YoY Growth) Chart

CMG Revenue (Quarterly YoY Growth) data by YCharts

If Chipotle's stock seems expensive to you just because it sells in the high $500's, even though it's cheaper than Potbelly and Noodles & Company on a forward P/E basis, you may be anchoring. Remember that stocks don't operate on a bell curve, if earnings grow, a stock price will never fully return to the pack. 

If you can see the value in Chipotle here, you're thinking Foolishly. 

Rising food costs make Chipotle a value stock

One sour note from Chipotle's most recent earnings call was that food costs took a small bite out of profits. But food inflation isn't something Chipotle will face alone; Noodles & Company is already feeling the pain of rising shrimp costs.

Food costs are always a headwind for restaurants; everyone has to deal with them. So the question becomes, who can handle them better? I recently said we couldn't expect Chipotle to top its staggering 9.3% comparable sales figure, I'm happy to be wrong, comps came in at a whopping 13.4%. All three of these restaurants are expecting to open new stores, but with Potbelly, Noodles, and most restaurants growing comps below 5%, they're more vulnerable.

Chipotle's same-store sales tell us a few things. We know Chipotle has fans so loyal that they are willing to drive through rough weather for a burrito. If that loyalty holds true, we can also assume that Chipotle will be able to pass on higher food costs to its customers. We also know that there is enough demand for Chipotle to open new stores, which should lead to more profits. In short, the ridiculously high comps just tell us that Chipotle has enough fan loyalty and demand to weather some rough storms.

Bottom line: comps have value

With robust and accelerating same-store sales, Chipotle is working its way through bad weather and higher food costs. With that in mind its the only restaurant chain we can expect to grow despite external factors. This all adds tremendous value.

If you can get over the fact that the stock sells at a high dollar value, you will see that Chipotle should be trading at a much higher multiple than its peers. On a relative basis, it's quite cheap. 

6 stock picks poised for incredible growth
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Adem Tahiri owns shares of Potbelly Corporation. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information