Is Chipotle Still a Buy?

Chipotle (NYSE: CMG) has been a tremendously successful growth story, and it's easy to see why. Its co-CEO, Steve Ells, has been committed to the company since it first opened in 1993. It has an elegantly efficient operating model that allows customers to get their orders prepared any way they want. It has strong relationships with its suppliers and a focus on high-quality ingredients that forms the core of its brand. Its in-store experience puts fast-food competitors to shame. And its stated purpose -- "Food With Integrity" -- resonates with employees and customers alike. Chipotle wants to "change the way people think about and eat fast food." It's clearly not just another restaurant chain.

The numbers bear out Chipotle's strength as a business. It just opened its 1,000th store this past summer, and has plans to open 120-130 stores in 2010. It made its first entry into England this summer, and has plans to open in Paris in the middle of next year. Its restaurant-level margin (24.9%) was higher in 2009 than it was before the Great Recession. And its stock has been a boon for investors: While the S&P 500 is down since Chipotle went public in January 2006, Chipotle shares have jumped around 300%.

The past is the past. What's on the menu now?
Looking ahead, management has a four-pronged plan for the future. They'll continue to use their "Food With Integrity" vision to guide their interactions with suppliers and customers. They'll continue to grow their own talent. In Chipotle's Q2 conference call, co-CEO Marty Moran underscored the company's focus on developing future leaders. The best store managers will continue to get a $10,000 bonus for each staff hire they make that eventually becomes another store manager. Chipotle will continue to expand, using its "A-Model" store concept to put smaller stores in lower-traffic areas. Finally, they'll boost their marketing to help spread the gospel of natural ingredients.

But what about the stock?
Despite all of this, I don't think I'd run out and buy Chipotle shares today. The company is built on the premise that its customers and suppliers will continue to support its strategy of higher prices for a higher purpose. So far, that premise has played out beautifully, and investors have been handsomely rewarded. But management fully admits that the difficult economy could alter customer spending habits in favor of lower-priced competitors. It could also limit access to the high-quality ingredients that form the foundation for Chipotle's brand. In an industry with such low switching costs, those could be significant risks.

But the main problem is a valuation one. As the table below shows, Chipotle trades at a significantly higher earnings premium than many other prominent service-industry companies. And its P/E of nearly 40 is more than twice the industry average.

Source: Capital IQ, a division of Standard & Poor's.

Most commentators would admit that despite the weak economy, Chipotle's growth prospects look strong. But it also looks like much of that growth is priced in already, with the stock price topping $200 last week. Fool analyst Rich Greifner values Chipotle north of $180 only in the best-case scenario. In that scenario, Chipotle would grow to 3,700 stores over the next dozen years, all while improving operating margins. It would need to expand stores at 11% a year in order to hit that mark. And while the company plans to grow stores at 13% in 2010, its ability to produce similar growth past 2020 seems like an awfully risky long-term bet. I personally lightened up on my Chipotle shares recently. While I don't have too much trouble paying up for an all-natural Chipotle burrito, it seems like there are better stock bargains out there to feast on these days.