Holy Guacamole, Chipotle!

It's a good thing the burritos are big, because Chipotle Mexican Grill (NYSE: CMG  ) is packing quite the appetite. The popular chain of more than 600 quick-service eateries has posted another market-thumping quarter. Earnings soared 46% higher to hit $0.38 a share, well above the $0.32 that Wall Street had been expecting. Revenue surged 26% higher to $236.1 million, also well ahead of analyst projections.

Trouncing targets has become as regular a sight for Chipotle as the quick-moving lines that snake along the burrito-assembly lines in its restaurants. And although the company's eats are inspired by Mexican favorites, its financial performance has never fallen south of the border.

Quarter

EPS

Analyst Estimate

% Surpassed

Q1 2007

$0.38

$0.32

19%

Q4 2006

$0.33

$0.28

18%

Q3 2006

$0.36

$0.27

33%

Q2 2006

$0.33

$0.25

32%

Q1 2006

$0.26

$0.12

117%

Q4 2005

$0.16

$0.11

45%

Source: Thomson First Call.

The sign of a great growth stock is the ability to humble the pros early and often. That describes Chipotle, which has been greeting analysts with joy-buzzer handshakes and inviting them to sit on banana-cream-pie whoopee cushions. Wall Street should know better, yet it's always getting punk'd.

It's pronounced chee-poat-lay
Despite pesky pricing for avocados and rival restaurateurs bellyaching over rising labor costs, Chipotle's operating margins actually improved by 50 basis points to 20.7% for the quarter that ended in March. Comps climbed 8.3%, and that's stacked on top of a jaw-dropping 19.7% store-level spurt a year earlier.

The company's success rests in its simplicity. The commitment to fresh ingredients and a simple menu works. Chipotle head honchos were asked about the possibility of drive-through windows, but the company said it has no desire to implement rival systems that can dampen the customer experience. This isn't to say that it's immune to technology -- customers can already fax over their orders or even place them online -- but Chipotle will implement a change only if it will improve operating efficiency. In short, you'll probably never see a guacamole shake on the menu.

Surveying the playing field
Things aren't as chipper at many of its rivals. Wendy's (NYSE: WEN  ) sold off its Baja Fresh chain last year, and growth at CKE Restaurants' (NYSE: CKR  ) La Salsa has been stagnant. An exception has been Jack in the Box's (NYSE: JBX  ) fast-growing Qdoba chain.

All told, it's been a great run so far for Chipotle. The chain wasn't getting it done as a subsidiary at the behemoth that is McDonald's (NYSE: MCD  ) , so the burger giant decided to spin it off, and the IPO was as big a hit as its burritos. The shares were priced at $22 but popped to $45 a stub at the open. Chipotle hasn't looked back. The stock has now tripled off that IPO price.

Chipotle has earned it, but the stock isn't exactly cheap. It is trading at 42 times this year's earnings and 33 times the 2008 target. Then again, you already know how analysts have a habit of playing lowball here. Estimates are likely to inch higher in this never-ending game of catch-up. Six months ago, Wall Street figured that Chipotle would earn $1.31 a share this year. That consensus estimate is now up to $1.59, and it's climbing.

The company's goal of growing earnings by at least 25% over the long term has been easily eclipsed in the near term. That justifies the seemingly lofty earnings multiple. After buying the last eight franchised locations in March and April, Chipotle is now truly in control of its company-owned empire's destiny. 

Until Chipotle is proved mortal, it doesn't matter whether avocadoes are hard to come by. There's enough green to be seen elsewhere.

For more on Chipotle, check out:

It shouldn't come as a surprise that Chipotle has been recommended in not just one but two Motley Fool newsletters in recent months. I tapped it as aRule Breakers recommendation, while Bill Mann went with the more attractively priced, though less frequently traded, Class B shares (NYSE: CMG-B  ) forMotley Fool Hidden Gems. Both newsletters are available for a free 30-day trial.

Longtime Fool contributor Rick Munarriz can walk to a Salsarita or jog to a Baja Fresh and a pair of Qdobas, but he can't wait for a Chipotle to open closer than 25 miles away from his Miami home. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.  


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