In the past few years, fast-casual joint Chipotle Mexican Grill (NYSE:CMG) has endured repeated attacks from bears who don't believe a restaurant chain could possibly merit a high valuation of 40, 50, or even 60 times earnings. This skepticism has caused Chipotle stock to drop significantly on several occasions since 2012.
Most recently, Chipotle stock fell from an all-time high of $727.97 in January to as low as $597.33 just last week. But since then, the stock has rallied more than 10%. In the long run, it's likely to move much higher, as Chipotle still has many years of strong growth ahead of it.
Investors fear slowing growth
Chipotle's strong earnings growth over the past couple of years has helped bring its valuation down a bit from the stratosphere. Chipotle shares now trade for roughly 38 times projected 2015 earnings. Nevertheless, that valuation still incorporates high growth expectations.
Thus, Chipotle investors have been worried that the company continues to project low-mid single digit comparable restaurant sales growth for 2015, as of April. That compares to a stellar 16.8% increase in 2014. Moreover, given that comparable restaurant sales rose 10.4% in Q1, Chipotle's guidance implies that comp growth could be near flat later in the year.
Fears may be overblown
However, Chipotle's guidance has often proven to be conservative in recent years. A recent research report from Orbital Insight found that car counts at Chipotle parking lots were up 10% year over year in Q2. Of course, many Chipotle restaurants are located in cities and do not have parking lots, but this finding still points to strong traffic trends during the busy spring season.
Furthermore, Chipotle has found a new pork supplier, according to a Bloomberg report. This will allow Chipotle to reintroduce its pork carnitas entree nationwide by the end of 2015, after having to remove pork from a third of its restaurants in January due to shortages after it suspended a supplier. That will remove another headwind to sales growth.
Finally, Chipotle CFO Jack Hartung told investors earlier this year that the company was considering another price increase, targeted mainly at beef entrees. While Chipotle raised beef entree prices significantly last spring, it wasn't enough to offset rapid beef-related cost inflation.
Sure enough, a recent survey by research analysts at William Blair found that Chipotle had raised prices in several markets, primarily focusing on its two beef items (steak and barbacoa). There were broader price increases in San Francisco, though, to offset a significant increase in the local minimum wage.
Assuming they don't drive customers away, higher prices will boost Chipotle's sales growth. And based on the company's strong 2014 performance, most customers seem perfectly willing to pay more. Moreover, price increases will bolster the company's already-solid profit margin.
A big long-term growth opportunity
In addition to growing comparable restaurant sales, Chipotle is also expanding its footprint. The company plans to add 190-205 locations this year, expanding its restaurant count by more than 10% to nearly 2,000 locations globally.
Yet Chipotle estimated at the time of its IPO that it had the potential to operate at least 4,000 restaurants in the U.S. in the long run. Since then, it has started to expand internationally. It has also begun testing two new restaurant concepts: ShopHouse Southeast Asian Kitchen and Pizzeria Locale. And it has successfully pioneered smaller restaurant formats.
All of these developments increase Chipotle's long-term growth opportunity. Chipotle should be able to add hundreds of restaurants annually for many more years -- maybe even decades. Meanwhile, it can continue to boost sales per restaurant.
Chipotle bears have gotten burned in the past week or so as the stock has bounced back from the $600 level. Based on the company's incredible long-term potential, they're likely to continue getting burned in the years to come.