Image: Chipotle

Chipotle Mexican Grill (NYSE:CMG) has been a darling of the market for quite some time now. It continues to grow into an even stronger company each year, and investors have noticed, driving the share price up over 650% in the past five years. Following the stock's run over the last few years, and especially in the last few weeks following its Q3 earnings release, the company is priced at a premium -- over 50 times earnings. Comparing this to the market average P/E of 30, or to the 18 P/E McDonald's sports, investors should ask themselves: Is Chipotle's stock still worth the premium? Let's take a look.

Chipotle recently reported an exceptional third quarter, with a whopping 49% increase in earnings year over year. This growth rate is well ahead of anything McDonald's, which is well past its high-growth phase, has been able to post in its recent history. With rising same-store sales, expanding free cash flow, and plenty of room for increased expansion, here's why Chipotle's stock still has room to rise further, and may still be worth its premium price.

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Same-store sales continue to rise
Chipotle's recent revenue increases, including a year-over-year 31% jump in its just-completed Q3, are due to a mix of increased traffic and higher per-customer revenue stemming from increased menu prices and options. While the company has opened many new locations this year -- 43 in Q3, and an expected 190 total by the end of 2014 -- most of this increased revenue came from the company's consistent growth in same-store sales, which measure sales at restaurants open at least a year. Chipotle closed the quarter with 1,724 restaurants.

Image: Chipotle

In the most recent quarter reported, comparable-store sales rose nearly 20%, YOY, ahead of the expected 17.3%. This shows that, regardless of whether the company can keep expanding its locations, it can continue to grow just from the locations it has, but even more exciting, expansion both domestically and internationally will help the company to continue to grow well past its current revenue and profit levels.

Expansion, both domestic and international, will boost future growth
Domestic expansion has been a highlight of the company's run over the last few years. Chipotle currently operates 1,724 locations, nearly half of which opened in the last four years as Chiptole expanded at around 200 new locations a year. Chipotle management has said in the past that it sees an eventual future of 4,000 stores in the U.S. During the recent quarterly earnings, management said it expect as much 205 new stores in 2015.

Outside of the U.S., the company has started to make a footprint in Europe. The company is making headway by placing stores in the U.K., Germany, and France. While this has been a slow start, and the company has not given a timeline for when this expansion could ramp up, its methodical expansion gives it a solid base and plenty of room to grow for when the U.S. market begins to get more saturated. With less than 20 of its locations in foreign markets, this represents massive growth potential for the company when it decides it's the right time to be more aggressive.

And it's not just expansion of Chipotle stores that's helping the company grow at its rapid pace -- it's also the company's strategy of branching out into different cuisine. ShopHouse Southeast Asian Kitchen and Pizzeria Locale are two small restaurant chains that Chipotle is experimenting with to see if the Chipotle model can be fit to other cuisine with the same success. Assuming the company can make these restaurant brands even partially as successful as its main Chipotle brand, this could be another major source of long-term growth.

What Chipotle's stock could be worth in the future
Now, let's get to some valuation. While we can hope that Chipotle's operating model and managerial decisions about pricing and options continue to drive up same-store sales, and that domestic and international expansion will eventually lead to many more locations to drive revenues further, we still need to check the value of the stock to see if there is real potential for long-term returns at current prices. 

Free cash flow (FCF) is one way to look at where Chipotle's stock may be headed. The company has been able to grow its FCF steadily in the last few years, at a compounded annual growth rate of around 23%. Chipotle currently trades at around 40 times free cash flow.

If the company can continue to grow free cash flow at even a more conservative 15%-20% in the next five years, a very likely scenario based on the growth opportunities discussed above, then the company could see over $800 million in cash annually by 2019. If the stock maintains around a 40 times free cash flow price, that would translate to a stock value of around $1,000.

From that free cash flow analysis, it's clear that if Chipotle can keep growing its revenue and cash at current levels or even a little slower, the stock could see 50% upside in the next five years. To keep growth rates going, the company will need to gain revenue and profits both from its existing locations and from new ones, two things the company has consistently shown it can do.