Whether they're investing in it or eating it, everybody seems to love Chipotle Mexican Grill (NYSE:CMG). And there's plenty to like. In July, the restaurant chain reported an 18.2% revenue increase , and kept that momentum moving during the next quarter, with sales rising another 18% to $826.9 million.
All might seem great in this land of high-quality, low-cost Mexican food, but while the product may be inexpensive, some metrics are starting to suggest otherwise of the stock itself. Namely, Chipotle's price-to-earnings ratio is staggering- higher than it's been in nearly six years- and that statistic is leaving some investors with an uneasy stomach.
Deconstructing the PE
Chipotle's earnings per share for the trailing twelve months clock in at $9.87 , while its stock price was $535.42 per share on Nov. 12 . This creates a P/E ratio of 54.2, while the restaurant industry generally comes in at around 25.
According to a recent YCharts article , the only publicly traded restaurant with a market cap of at least $1 billion that beats Chipotle's P/E is Noodles and Company. The newly public business is nowhere near the size of Chipotle, of course, and its ridiculously overly inflated PE of 197.4 can be traced to a struggle to retain its sales dollars after operational costs. Even though the company brought in $87.8 million last quarter, only 3% of that fell to the bottom line , and that was a huge improvement from the same time a year earlier, when net income was a mere $133 thousand, or 0.1% of revenue.
In Chipotle's case, the company's stock spiked from $439 to over $500 on the day of its earnings (an all-time high), and hasn't come down since. This might look like great news at first, but it suggests a dangerous volatility- if Chipotle shares can spike this high on the heels of a good quarter, imagine what could happen after a bad call, or even a neutral one.
Paying for quality
Not to say that Chipotle doesn't deserve positive feedback from the market. Among the many impressive stats in its last earnings report, the company opened 37 new restaurants during the quarter, 129 locations year-to-date, and boosted its same-store sales by 6.2%.
The market is also lauding this business for its long-term emphasis on quality of product, service, and environment. You don't go to Chipotle just to get a burrito. You go because the line (although perhaps insanely long) will likely be quickly navigated, and the food will be made exactly how you want it- regardless of your dietary preferences- with high-quality ingredients. Chipotle is working to boost this service even further, with programs for restaurateur training, and the further development of an "expediter" position that works on speeding up lines during peak traffic hours.
The value of a good ingredient
There might not seem to be a high barrier to entry for breaking into the Mexican fast-food market, but Chipotle ups the ante by placing particular focus on the freshness of its ingredients. Food costs took up 33.6% of last quarter's revenue, thanks to rising prices for salsa ingredients like tomatoes and tomatillos, along with chicken and dairy products.
Additionally, Chipotle has built a reputation as trustworthy among customers and shareholders alike- even if that means admitting to unsavory facts in the process. In March, the company was the first restaurant to voluntarily come clean about its use of genetically modified organisms (or GMO's) in its meat and tortilla products, and has been working to phase them out ever since. While finding alternatives- specifically converting GMO soy oil to more expensive non-GMO rice bran oil and sunflower oil- hasn't been cheap, it speaks volumes to the validity of the company's transparency.
Waiting on a cheap burrito
The report card for Chipotle comes up with a solid list of positives. Besides its food, the company boasts solid management, and a business model focused on transparency and growth. Chipotle deserves good press, but the market has taken that success and run with it like a sugar-crazed child on Halloween. If, for whatever reason, Chipotle can't sustain this recent trend of success, Mr. Market could very likely throw a tantrum, and maybe send its stock plummeting as a result.
Regardless of a Wall Street sugar high, the company has plenty of opportunity to continue expanding its locations and growing its earnings per share. That said, for the time being, it might be wise to wait for Chipotle's P/E to come back down to earth before diving into its stock headfirst, at the risk of being on the wrong end of a potentially massive sugar crash.
Fool contributor Caroline Bennett has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.