By
Jason Ramage
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January 17, 2008
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As expected, my dueling foe, Morgan Housel, opened by emphasizing the sizzling valuation Mr. Market is currently asking for Chipotle Mexican Grill (NYSE: CMG ) (NYSE: CMG-B ) shares. Of course, it's a valid argument, as paying too much for great stocks kills the returns of many an investor.
In this case, however, while Chipotle shares tested the limits of sanity before pulling back recently, I don't think we're currently looking at nosebleed valuations.
Management at Chipotle has shown that it knows how to successfully implement growth strategies thus far. Continued margin expansion and the development of new store bases are foreseeable for an extended period of time. Those are characteristics that don't come cheap.
By my calculations, if Chipotle can realize 28% earnings growth over the long haul, and sells for 25 times earnings in five years, a somewhat more attractive annualized return of 12% from today's level may be served up on investors' dinner plates.
Of course, I have to admit that this week's precipitous drop in Chipotle's share price seasons the math a bit better on my side of the argument. Still, if you intend to truly own this company, buying on these dips will likely pay off during more exuberant times.
Don't forget to read the rest of the Duel and vote for a winner.
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