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Is Chipotle Overstuffed With Optimism?

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

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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.

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Stocks Mentioned

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

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

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