Chipotle Is Looking Overstuffed Again

Is another Chipotle (NYSE:CMG) bubble forming?

It's starting to look like it, after the 12% surge following its latest earnings report. In 2012, we saw Chipotle peak at a price over $440, before tumbling down to $240 in October after two poorly reviewed earnings reports. Since then the share price has steadily climbed back before jumping to a closing price of $366.25.

But considering the reports that sent Wall Street fleeing last year, the first-quarter earnings results leave much to be desired. The table below shows a comparison.

Source: Company press releases. (Note: Adjusted revenue and comps accounts for two fewer days in the first quarter due to the absence of Leap Day and closing on Easter, compared to the year before.)

If you had to guess which of these quarters was greeted with cheers, as opposed to two that received jeers, chances are you wouldn't say the most recent quarter. Out of the four categories, first-quarter 2013 was the worst performer in all except EPS. Importantly, sales growth and income growth have steadily slowed over the last year, though the market seems to be ignoring that.  

Friday's jump in the share price seemed to come from Chipotle's strong earnings beat, as the Street consensus was at just $2.14, but that was mostly the cause of non-recurring items. In the last quarter, Chipotle had a one-time $0.10 benefit related to 2012 tax credits. The year-over-year comparison also benefited from a one-time $5.6 million, or $0.17 per share, stock compensation expense last year, the lack of which helped the burrito chain decrease G&A expenses by 160 basis points. Factoring out the benefit of those two gains, EPS would've improved only to $2.18, barely ahead of estimates. The burrito chain also slightly beat revenue expectations for the quarter.

Foolish bottom line
At a time when other restaurant chains like McDonald's and Yum! Brands are struggling, it's certainly nice to see Chipotle come in ahead of estimates, but I'd be wary of another run-up in the share price. Revenue growth has slowed down, and with it, earnings growth will inevitably cool off also. A share buyback program over the last year had helped boost per-share profits, but management seemed to convey less of a desire to buy back shares with the price back up. Management also said another price increase could come as soon as late summer, which seemed to excite investors, but they can't count on higher prices alone to drive growth.

I still believe in Chipotle as a long-term story, as its brand strength only increases as it grows its restaurant count, and I commend management for avoiding the easy path to growth of the franchise model, which most of its competitors employ. However, 13% revenue growth isn't enough to warrant a share price much higher than where it sits currently, with  a P/E of 40. If stock climbs back into the $400 range and we see another earnings miss, don't be surprised if shares dive once again.