Editor's note: An earlier version of this article incorrectly said Chipotle would release earnings after market close Tuesday. The article has now been corrected.
It's easy to get nervous about Chipotle Mexican Grill
The stock's been on a tear. It was trading in the double digits a year ago. It closed at $247.55 yesterday. Earnings have been strong but not that strong. In other words, the bottom-line multiples have been expanding. Chipotle now trades at 48 times what analysts believe the burrito chain earned last year and 37 times forward profitability.
There are also cost concerns as commodity prices skyrocket. Let's also not forget last month's hiring scandal where Chipotle had to fire hundreds of undocumented immigrants working in its Minnesota restaurants.
You just haven't lived as a chain until you have protesters chained up to one another in one of your stores holding up signs that read "Chipotle: You cannot sell Mexican food and then sell out Mexican workers."
Well, let me set your mind at ease. Let's go through a few reasons not to worry about the fourth-quarter report.
1. Food cost concerns are overblown
Investors weren't impressed with Taco Bell parent Yum! Brands'
However, even under a climate of rising food costs globally and a labor spike overseas, Yum! managed to post a 27% gain in earnings on a mere 7% top-line uptick. In other words, net margins expanded. Chipotle's been the same way over the years, and it's not married to $0.99 price points the way Taco Bell is.
Besides, food and beverage costs gobble up less than a third of Chipotle's revenue. Any menu price hikes to adjust for higher component prices will be smaller on a percentage basis than what consumers are seeing at the supermarket.
2. Estimates are moving targets
Analysts see Chipotle's earnings climbing 30%, to $1.29 a share, in the quarterly report.
Good luck if you believe it. Chipotle has routinely landed ahead of Wall Street guesstimates since it was spun off by McDonald's as a stand-alone public company. It has beaten the profit projections in each of the past eight quarters, and it hasn't even been close lately.
Source: Thomson Reuters.
I wouldn't bet against it this time around, either.
3. The economy is bouncing back
Chipotle managed to grow comps during the recession, which is a stiff challenge when you think about unemployment affecting lunchtime traffic and emptier pockets forcing consumers to eat in at night.
Is there any reason to believe that consumers have tired of Chipotle? This is a concept that has transcended the malaise inherent in rival burrito rollers at Baja Fresh, La Salsa, and Jack in the Box's
Blowout quarters have a funny way of debunking overvaluation myths. We'll see if that holds up yet again for Chipotle.
Are restaurant stocks good investments these days? Share your thoughts in the comment box below.