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Chipotle Mexican Grill, Inc. Baffles Wall Street, but This Growth Story Is Just Beginning

Isaac Pino, CPA
February 2, 2014

For all the simplicity of its restaurant business, Chipotle Mexican Grill (NYSE: CMG) continues to baffle some Wall Street analysts. On one hand, the growth figures just don't seem to make sense. On the other, analysts have missed the boat so often with Chipotle that it's success is almost unbearable. At some point, the burrito has to burst, right?

Commentary from the boutique investment bank Wedbush serves as the latest example of Wall Street's bewilderment over the burrito maker. On Jan. 24, Wedbush downgraded Chipotle's shares while predicting that same-store sales growth would trend toward a consensus of 6.7%. A week later, Chipotle reported a 9.3% increase in same store sales, topping Wedbush's expectations by 38%.

Wedbush also estimated revenue of $820 million and maintained a price target of $510 per share. Needless to say, Chipotle posted revenue of $844.1 on Friday, reflecting 20.7% revenue growth, and shares subsequently soared to $550.

It was a scorching-hot quarter, by all accounts, especially since the fast-casual chain is averaging 20% revenue and 30% earnings growth year over year even after two decades in operation.

Chipotle's management team continues to run its restaurants like clockwork, while more than one Wall Street shop remains anchored on an outdated approach to evaluating its business model.

Following Chipotle's earnings, analysts at the investment bank Raymond James fessed up to their prior blunders:

We continue to be wrong-footed by waiting for a maturation of [Chipotle] per-unit sales, which we would expect to create a lower-risk reentry point for investors. Instead, the chain continues to produce industry-leading comp sales growth despite its significant size.

Yet in spite of another spectacular quarter, the team of analysts still refused to change their position on Chipotle's shares:

However given overall sluggish restaurant demand trends, we cannot bring ourselves to recommend chasing the stock, so we reiterate our Market Perform rating. ... [W]e also expect to see comp trends normalize in the 3-5% range over the next few years. This should eventually push the stock's P/E ratio closer to its long-term EPS growth rate of 18-20%.

From Raymond James' perspective, buyers at these levels would be merely "chasing" shares with limited upside potential. The problem with this analysis, in my opinion, is that Chipotle very rarely -- if ever -- looks "cheap" by traditional measures like price-to-earnings ratios.

Furthermore, investors who hold out for the "perfect" buy-in price could wind up on the sidelines watching a tremendous company outperform year after year. As The Motley Fool's co-founder David Gardner describes, investors who put a mental blockade between themselves and excellent companies often miss out on multibagger stocks:<