Is Chipotle Overvalued?

Chipotle's (NYSE: CMG  ) stock continues to sizzle, but every momentum stock eventually loses steam. How do you know when to jump off the momentum train? You can rely on intuition -- probably a bad idea -- or crunch the numbers and see whether they add up. Let's break out the calculator and determine whether Chipotle's share price might be headed south of the border.

A look at los numeros
Growth for Chipotle means selling more burritos, by increasing same-store sales and adding stores. In the recent conference call, management projected same-store sales to increase in the "low single digits." For my analysis, I'm going to call that 3%. Management also plans to add 135 to 145 stores in 2011 -- let's say 140.

Over the last four quarters, the company has brought approximately 10% of sales to the bottom line. The following table extends these assumptions over the next two years.

Metric 2010 (Actual) 2011 (Projected) 2012 (Projected)
Sales per store $1.69 million $1.75 million $1.8 million
Stores 1,084 1,224 1,364
Total Sales $1.83 billion $2.14 billion $2.45 billion
Profit Margin 9.8% 10% 10%
Profit $179 million $213.6 million, or $6.89 per share $245.1 million, or $7.91 per share

So what value should we place on such performance? In the restaurant industry, the average forward P/E hovers around 20. But Chipotle likely has greater growth potential than larger restaurant chains like former parent McDonald's (NYSE: MCD  ) , so it deserves a higher P/E than the 14 of the Golden Arches.

But how much higher? Peter Lynch famously said, "The P/E ratio of any company that's fairly priced will equal its growth rate." Lynch was referring to annual growth rate. Analysts predict about 20% annual five-year growth for Chipotle – a little bit higher than what we've got here. But let's run with that number.

Here's the calculation of stock value, assuming a P/E multiple equal to the analysts' projected growth rate, with a few higher multiples for comparison:


20 times

30 times

40 times

2011 earnings of $6.89 $138 $207 $276
2012 earnings of $7.91 $158 $237 $316

The bottom line
With a recent price of $281, it would appear that Chipotle has neared its peak. In light of the generous P/E ratios that I have applied to future earnings, sky-high investor expectations may have left the company overvalued.

If you're looking for growth in restaurants without the gaudy price, check out Famous Dave's of America (Nasdaq: DAVE  ) and Tim Hortons (NYSE: THI  ) . Both restaurant chains have PEG ratios less than 1, signaling that their bottom lines are growing faster than their share prices.  

Fool contributor Adam J. Crawford does not own shares in any company mentioned in this article. Chipotle is a Motley Fool Rule Breakers selection. Tim Hortons is a Motley Fool Global Gains recommendation. Chipotle is a Motley Fool Hidden Gems selection. McDonald's is a Motley Fool Income Investor pick. The Fool owns shares of Chipotle. 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.

Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2011, at 6:36 PM, buffalonate wrote:

    Great article. You are going to piss off a lot of momentum investors with this article. I think Buffalo Wild WIngs also is a good value. The only problem with this analysis is that the longterm growth rate is different from its growth this year. Many restaurants are improving earnings around 40% this year because the economy is still recovering. So they look really overpriced but when you look at their recent earnings they are only mildly over priced.

  • Report this Comment On April 13, 2011, at 7:03 PM, buffalonate wrote:

    I looked at the analyst estimates on Yahoo Finance and CMG blew them away so the future p/e's you have probably don't hold much water. CMG is growing about 50% this year so technically it is fairly priced but eventually the growth is going to slow down to a more normal 25% rate. I wouldn't be surprised if in the next couple of quarters that this company misses earnings estimates due to high commodities or high gas prices. When that happens this stock could crash hard.

  • Report this Comment On April 14, 2011, at 12:10 AM, ACrawf wrote:

    Good point. Management is concerned about rising commodity prices (see conference call). They said they are going to hold off on raising prices for now but I bet eventually they do. It will be interesting to see how the consumer reacts if they do, in fact, raise prices.

    Haven't checked out Buffalo Wild Wings but I will do so.

  • Report this Comment On April 14, 2011, at 10:12 AM, ldkoehler wrote:

    I agree that CMG is overvalued and a dangerous stock to own. The company is clearly making money, but the market seems to be pricing in continued exceptional growth and profitability. That might be possible, but investors should be trying to find stocks with more reasonable expectations. Even if we assume the company can grow revenue by 20% every year, CMG will have to maintain that pace for the next 12 years and improve it's economic earnings margins on average to 2.9% from just 1.1% over the last 3 years.

    Anything is possible of course, see what GOOG has done since it's IPO, but I'd rather invest in a stock without outsized expectations already embedded in it's stock price.

    Here a link to a free report on CMG from New Constructs and some additional info:

    The company has positive and improving economic earnings and a 9% ROIC, which are both appealing. It's when we start looking at valuation metrics like its -0.4% FCF Yield, 5.9 price-to-economic book value that the company looks dangerous. By way of comparison, the S&P 500 has a FCF Yield of 3.3% and a price-to-economic book value of 1.3.

  • Report this Comment On July 15, 2014, at 12:49 PM, EquityBull wrote:

    Today CMG is 600/share in mid 2014. What can we learn from this analysis? Is CMG a buy today and will it look cheap in 3 years?

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