I must commend my Fool Duel counterpart Matt Koppenheffer for his conservative stance on the investment appeal of Chipotle (NYSE: CMG ) (NYSE: CMG-B ) at its current levels. I mean, we both just made it back from Omaha, after a weekend of hearing Messrs. Buffett and Munger stress margin of safety when evaluating investments. It probably pays to take a breather after Chipotle's recent run to a 52-week high. But don't unlace your sneakers just yet.
What would make an appropriate margin of safety to invest in Chipotle? At the end of the day, a high or low price-to-earnings multiple means little; the cash flow a company will generate during its lifetime is far more important, discounted back to today to calculate the firm's intrinsic value.
As far as I can tell, Chipotle will need to grow at nearly 27% a year for the next five years just to justify its current stock price. Those are some pretty lofty expectations. For investors to make money here, it appears that the company will need to stay hot for about the next decade, at least.
That's a tall order, but it's happened before. Starbucks (Nasdaq: SBUX ) has been growing at these levels for nearly two decades, and past investors willing to pay up for growth made a fortune investing in McDonald's (NYSE: MCD ) in the 1970s and Wal-Mart (NYSE: WMT ) in the 1980s. Fast-growing Walgreen (NYSE: WAG ) rarely ever trades at less than 20 times earnings, and it's headed above 30 times many times throughout its history.
In short, retail and restaurant concepts can be worth paying up for -- if their growth continues at a breakneck pace. As I outlined in my bullish opener to today's Duel, I think Chipotle has a number of key ingredients to warrant consideration as the next great restaurant concept. You should base your own margin of safety on how long you think Chipotle will remain one of the fastest-growing restaurant chains around.
Chipotle is a Rule Breakers and aMotley Fool Hidden Gems recommendation. Starbucks is a Motley Fool Stock Advisor selection, while Wal-Mart is anInside Value pick. Try any of our Fool newsletters free for 30 days.
Fool contributor Ryan Fuhrmann is long shares of Starbucks and Walgreen but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback, or to discuss any companies mentioned further.