Dueling Fools: Chipotle Bear Rebuttal

According to my worthy Foolish counterpart Ryan Fuhrmann, Chipotle Mexican Grill (NYSE: CMG) (NYSE: CMG-B) is a hot, expensive stock. Ryan argues that it may well be worth the price, given the quality of its operations and its projected expansion. It's hard to dispute that Chipotle's enjoyed scorching growth and an army of loyal customers. That won't stop me from trying, though.

I took a simple look at Chipotle's potential over the next five years, assuming that its revenue basically matches analysts' estimates for the next two years, then tacks on 20% each year after that. For the operating margin, I took the median of 10.6% from the group that Ryan showed us in his bull pitch, and I assumed that Chipotle works up to that over the five-year time period. I also assumed a constant 39% tax rate (its rate for 2006).

Finally, I assumed that five years from now, investors value Chipotle at 22 times trailing earnings, the median of a larger group of comparables. They include Sonic (Nasdaq: SONC), P.F. Chang's (Nasdaq: PFCB), Buffalo Wild Wings (Nasdaq: BWLD), and Texas Roadhouse from Ryan's comp list, as well as Cheesecake Factory (Nasdaq: CAKE) and Jack in the Box (NYSE: JBX), among others. The result: a 2012 market value of $3.8 billion for Chipotle, or an average annual growth of 8%.

While 8% per year is nothing to sneeze at, I've assumed not only sustained strong growth for Chipotle, but also margin expansion -- something I'm typically loath to build into my assumptions. Over a five-year time period, I could get nearly the same return from an index fund -- with significantly less opportunity for heartburn.

Ryan is absolutely right in one respect: Great companies make investors a lot of money, even though they typically come at a price premium. There are plenty of examples to support this. But not every fast-growing, high-priced stock is supported by a company destined to become a superstar.

Is Chipotle on that road to stardom? Count me unconvinced.

The Duel's not done yet! Go back and read the other arguments, then vote for the winner, and share your own opinions on Chipotle in Motley Fool CAPS.

Rule Breakers and Motley Fool Hidden Gems have both recommended Chipotle (Hidden Gems recommends the B shares). Buffalo Wild Wings is a Hidden Gems pick, too. You can try either newsletter free for 30 days.

Fool contributor Matt Koppenheffer still finds Chipotle's stock just a bit too caliente. He does not own shares of any of the companies mentioned. Matt tried to out-eat the Fool's disclosure policy at Chipotle but lost miserably.