According to my worthy Foolish counterpart Ryan Fuhrmann, Chipotle Mexican Grill
I took a simple look at Chipotle's potential over the next five years, assuming that its revenue basically matches analysts' estimates for the next two years, then tacks on 20% each year after that. For the operating margin, I took the median of 10.6% from the group that Ryan showed us in his bull pitch, and I assumed that Chipotle works up to that over the five-year time period. I also assumed a constant 39% tax rate (its rate for 2006).
Finally, I assumed that five years from now, investors value Chipotle at 22 times trailing earnings, the median of a larger group of comparables. They include Sonic
While 8% per year is nothing to sneeze at, I've assumed not only sustained strong growth for Chipotle, but also margin expansion -- something I'm typically loath to build into my assumptions. Over a five-year time period, I could get nearly the same return from an index fund -- with significantly less opportunity for heartburn.
Ryan is absolutely right in one respect: Great companies make investors a lot of money, even though they typically come at a price premium. There are plenty of examples to support this. But not every fast-growing, high-priced stock is supported by a company destined to become a superstar.
Is Chipotle on that road to stardom? Count me unconvinced.
Rule Breakers and Motley Fool Hidden Gems have both recommended Chipotle (Hidden Gems recommends the B shares). Buffalo Wild Wings is a Hidden Gems pick, too. You can try either newsletter free for 30 days.
Fool contributor Matt Koppenheffer still finds Chipotle's stock just a bit too caliente. He does not own shares of any of the companies mentioned. Matt tried to out-eat the Fool's disclosure policy at Chipotle but lost miserably.