Please ensure Javascript is enabled for purposes of website accessibility

Is Chipotle Overstuffed With Optimism?

By Alyce Lomax - Updated Apr 5, 2017 at 5:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The numbers look great, but is it time to invest?

Chipotle (NYSE:CMG) (NYSE:CMG-B) has been on a real roll lately -- enough to make some investors wonder whether it's getting too hot too handle. However, third-quarter results packed a tasty kick and didn't give any indications that the burrito bonanza's falling apart just yet.

Third-quarter net income increased 74.6% to $20.6 million, or $0.62 per share. Revenues increased 35.6% to $286.4 million, with same-store restaurant sales up 12.4%. In more good news, Chipotle was able to increase operating margins from 21.5% to 23%, and it decreased general and administrative expenses from 7.4% of revenue to 6.7%.

Chipotle has been quite a success story since it was separated from former parent McDonald's (NYSE:MCD), even in an environment in which some quick-serve companies haven't fared so well. One might look no further than Wendy's (NYSE:WEN), which has had a struggle on its hands lately and even sold off its own Mexican quick-serve chain, Baja Fresh. Even Starbucks (NASDAQ:SBUX) has had some growing pains lately, and many investors aren't nearly as enamored with that company as they used to be.

Chipotle's success is evident in the stock's meteoric rise -- it's up 137% in the past 12 months. Of course, that big climb has given many investors food for thought when it comes to whether Chipotle's getting a little bit ahead of itself.

After all, it's trading at a whopping 82 times trailing earnings and 55 times forward earnings. Its PEG ratio is 2.52, well exceeding the level that usually signals a value-priced stock. True, there's a lot of growth left to come for Chipotle over the long term, but it's easy to see that this burrito may be overstuffed with optimism at the moment.

I think Chipotle's a great company. I love the food, as well as its focus on natural and organic ingredients. However, having noticed that many pricy, premium stocks eventually do present a bargain when some temporary factor goes amiss, I'd rather wait for a more reasonable price before thinking about gobbling up Chipotle shares.

For related Foolishness, see the following articles:

Chipotle has been recommended by both Motley Fool Rule Breakers (the "A" shares) and Motley Fool Hidden Gems (the "B" shares). Starbucks is a Stock Advisor pick.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,658.29 (1.17%) $19.20
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG-B.DL
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$261.36 (0.50%) $1.30
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$86.49 (2.53%) $2.13
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$20.74 (-1.75%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
373%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.