Chipotle's (NYSE: CMG) stock continues to sizzle, but every momentum stock eventually loses steam. How do you know when to jump off the momentum train? You can rely on intuition -- probably a bad idea -- or crunch the numbers and see whether they add up. Let's break out the calculator and determine whether Chipotle's share price might be headed south of the border.

A look at los numeros
Growth for Chipotle means selling more burritos, by increasing same-store sales and adding stores. In the recent conference call, management projected same-store sales to increase in the "low single digits." For my analysis, I'm going to call that 3%. Management also plans to add 135 to 145 stores in 2011 -- let's say 140.

Over the last four quarters, the company has brought approximately 10% of sales to the bottom line. The following table extends these assumptions over the next two years.

Metric 2010 (Actual) 2011 (Projected) 2012 (Projected)
Sales per store $1.69 million $1.75 million $1.8 million
Stores 1,084 1,224 1,364
Total Sales $1.83 billion $2.14 billion $2.45 billion
Profit Margin 9.8% 10% 10%
Profit $179 million $213.6 million, or $6.89 per share $245.1 million, or $7.91 per share

So what value should we place on such performance? In the restaurant industry, the average forward P/E hovers around 20. But Chipotle likely has greater growth potential than larger restaurant chains like former parent McDonald's (NYSE: MCD), so it deserves a higher P/E than the 14 of the Golden Arches.

But how much higher? Peter Lynch famously said, "The P/E ratio of any company that's fairly priced will equal its growth rate." Lynch was referring to annual growth rate. Analysts predict about 20% annual five-year growth for Chipotle – a little bit higher than what we've got here. But let's run with that number.

Here's the calculation of stock value, assuming a P/E multiple equal to the analysts' projected growth rate, with a few higher multiples for comparison:


20 times

30 times

40 times

2011 earnings of $6.89 $138 $207 $276
2012 earnings of $7.91 $158 $237 $316

The bottom line
With a recent price of $281, it would appear that Chipotle has neared its peak. In light of the generous P/E ratios that I have applied to future earnings, sky-high investor expectations may have left the company overvalued.

If you're looking for growth in restaurants without the gaudy price, check out Famous Dave's of America (Nasdaq: DAVE) and Tim Hortons (NYSE: THI). Both restaurant chains have PEG ratios less than 1, signaling that their bottom lines are growing faster than their share prices.  

Fool contributor Adam J. Crawford does not own shares in any company mentioned in this article. Chipotle is a Motley Fool Rule Breakers selection. Tim Hortons is a Motley Fool Global Gains recommendation. Chipotle is a Motley Fool Hidden Gems selection. McDonald's is a Motley Fool Income Investor pick. The Fool owns shares of Chipotle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.