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Eat Chipotle's Burritos, but Beware of Its Stock

By Dan Caplinger - Apr 19, 2013 at 2:32PM

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The burrito giant re-entered the stratosphere today.

Shares of Chipotle Mexican Grill (CMG -0.33%) soared after the company reported strong earnings last night. By 2:15 p.m. EDT, the stock was up 11%, topping the $360 mark for the first time since last summer. But can the burrito king's stock live up to the promises its high valuation is making?

Based on the most recent quarterly report, you can definitely make a case justifying today's gains. The restaurant chain boosted its earnings by 22% on a 13% rise in revenue, with new-store growth driving the better results. Chipotle said it opened 48 new restaurants, and it hopes to hit 180 new locations for the year as a whole.

Source: Wikimedia Commons.

But while new store locations will definitely play a big role in Chipotle's future growth, it's equally essential that existing restaurants deliver growing sales as well. On that front, Chipotle's quarter wasn't as optimistic. With expectations for same-store sales between flat and slightly higher, Chipotle seems to foresee a typical drop in interest as the company becomes less of a novelty and more of an established player among its customers.

Moreover, although the company has discussed the potential for higher menu prices to offset rising food ingredient costs, Chipotle also remains sensitive to the financial situation of its customers. That could leave the company stuck in a tough situation as it weighs its choices -- either leaving prices unchanged and thus shrinking its margins or hiking prices and likely suffering a drop in demand.

Perhaps most importantly, Chipotle's healthy-eating concept is easily duplicable. Already, Panera Bread (PNRA) has made its own inroads into providing healthier fare, using the opportunity to bolster its own growth and expand beyond its initial food offerings. Yum! Brands' Taco Bell division may never be the competitor that David Einhorn thinks it will be, but as less bargain-conscious restaurants see that the healthy trend will continue, Chipotle won't have the burrito market to itself forever.

With the stock now trading at about 30 times forward earnings, even assuming that Chipotle will be able to grow its earnings at a 20% annual clip for the next five years would only bring the stock's earnings multiple down to about 16 or 17. That's a lot to pay for a burrito, and I think investors are letting their taste buds cloud their judgment of Chipotle's stock.

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Chipotle Mexican Grill, Inc. Stock Quote
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