Chipotle: The Whole Enchilada?

Last week, Chipotle Mexican Grill (NYSE: CMG  ) reported a monster quarter. Same-store sales grew 19.7%, revenue was up 40.2%, and reported EPS of $0.26 trounced Wall Street estimates of $0.12. Meanwhile, shares are up to $64 -- nearly tripling January's $22 IPO price in just four months! Can the company keep up this success, or have the shares gotten too expensive?

The first thing to understand is that Chipotle is primarily a growth story. By almost any measure of current earnings or assets, the company is expensive. Based on an average analyst EPS prediction of $0.79 in 2006, its 2006 P/E ratio is 81. That's rich, especially when compared to fellow high-flying restaurant concepts like Cheesecake Factory (Nasdaq: CAKE  ) , with a 2006 P/E of 28, or PaneraBread (Nasdaq: PNRA  ) , with a P/E 34.

Chipotle's growth, like that of all restaurants, will come from two sources: new store openings and same-store sales growth. Currently, Chipotle has approximately 500 stores, and management plans to open 75-100 stores per year for the next five years. By 2010, Chipotle could easily be twice its current size. Add in same-store growth in the mid-single digits, and Chipotle should be able to grow EPS by 25% during that time. That would put EPS at approximately $2 per share.

That would be excellent growth, and based on Chipotle's track record, it seems highly achievable. In 2001, the company had less than 200 stores. Four years later, they've achieved an average growth of 75 stores per year. During that same time period, annual same-store sales growth has averaged more than 13%.

However, Chipotle's current earnings multiple is bound to contract over the next five years. There is no historic precedent to indicate that a restaurant can maintain an earnings multiple of 80. In fact, the multiple will probably fall by at least half. So the company will need to double earnings just to maintain today's price.

There's a difference between a great company and a great stock. At today's prices, Chipotle is the former, not the latter. The burritos are delicious, the business model is brilliant, and years of growth lie ahead, but the stock price already reflects all of this. Until the price comes back to earth, I'll be feasting on Chipotle's burritos while scouring the market for better opportunities.

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Fool contributor Brendan Mathews likes his burritos with guacamole, and he welcomes your feedback. He does not own shares in any of the companies in this story. The Fool's disclosure policy is well-seasoned.


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