Chipotle: Expect a Growth Slowdown

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In the past decade, no fast-food company has shot up quite as fast as Chipotle Mexican Grill’s (NYSE: CMG) locations. Storefronts seem to be everywhere these days, and its stock price hasn’t shied away from accompanying the boom. Trading at around $417 a share, Chipotle stock certainly isn’t as affordable as its burritos anymore.

But an expensive stock certainly doesn’t mean a bad investment. And Chipotle has rewarded its investors in a big way. Ever since it’s 2006 split with McDonald’s (NYSE: MCD), Chipotle has gone up, up and up some more.

This trend continued through a successful-by-all-measures 2011, and has continued its rise to fast-food fame in 2012. With a new focus on healthy ingredients and “healthy” menu options, Chipotle has gained ground even with those who once considered Tex-Mex culinary offerings too cheap. Along with competitors like Panera Bread (NASDAQ: PNRA) and Subway, its cashed in on a new generation of fast-food restaurants.

The company has worked hard to align itself with a new generation of fast-food eaters, who had begun to pass up on McDonald’s and Burger King’s massive caloric counts. And it’s not just the health factor - Chipotle has proven a dedication to cage-free products, earning it a spot in the hearts of those who eat with that on their conscience.

The company has also aligned itself with a growing number of consumers taking notice to Chipotle’s insistence on serving “Food With Integrity”. With the initiative, the company has promised to use the best sustainably raised food possible.

Chipotle does face risks to its image.  For example Chipotle may face scrutiny with the company’s refusal to sign a popular Farm Worker Protection Agreement. The agreement concerns rights for workers in Florida, the state where Chipotle buys all of its tomatoes.

The campaign has already found support with progressive food bigwigs like Whole Foods and Trader Joe’s. More importantly, chains like McDonalds and Yum! Brands' (NYSE: YUM) Taco Bell have agreed to the farmer’s campaign. If these fast-food restaurants, often questionably invested in the quality of its farm workers, agree to the campaign, Chipotle risks an even larger hit to its reputation.  Chipotle’s February ad campaign, a video targeting the evils of factory farming, makes the refusal to sign the Florida farmers’ petition all the more glaring. That ad campaign wasn’t quiet either with ¾ a spot during the Super Bowl, as well as two spots during the Grammy Awards. Chipotle took another step in getting loud about its commitment and finds itself now taking a possible step back.

Of course, the company’s reputation is at stake with any challenge to its progressive approach. The last thing it needs, after its Super Bowl and Grammy commercial spots, is to be called out for hypocrisy. But challenges have come and gone and the company has managed to still remain undeniably profitable.

Chipotle loves nothing more than reminding its investors just how profitable the company has been, trumping a 52-week range of around $249-$426. The company released its “Back To The Start” video to do that reminding job, as well as encourage investors to stick with the burrito giants.

Consider this fact: with 1,230 restaurants nationwide, the value of each Chipotle storefront is now over $10 million, far surpassing McDonald’s stores at $3 million or Darden Restaurant’s Olive Garden at $2 million.

I have to say I’m tempted by the thought of the stock being a sell for now. For one, Chipotle has risen so fast that it’s just too likely to be overvalued. Investors have cashed in on the rise of its popularity, especially after splitting with McDonald’s in 2006. Analysts have called out its stock as one of the best short opportunities on the market.

I’m weary to say it’s overvalued though despite its price to earnings to growth ratio of 2.24.  There isn’t a fast-food company except McDonald’s that has done as well as Chipotle, and it’s easy to argue that, given its relatively new entry, Chipotle has done better. After all, McDonald’s knows the game. Chipotle has worked to create an image that didn’t exist before, and its done remarkably well.

So, yes, the stock has risen to reflect success. It’s not overvalued because the company is likely going to be able to expand margins by raising burrito prices for its loyal, consistent customer base even if sales growth flattens. I do not foresee the Florida farmers’ agreement being an issue with the company’s stock price. As I said, challenges have come and gone, and Chipotle has dedicated its resources to etching its reputation. It will not be easily erased.

However, I do not like the company’s outlook for sales growth moving forward. No doubt it will continue to keep its avid customer base. Its new restaurants will bring crowds in as they open. But the limited menu may grow old soon, as Chipotle does not champion changing deals as McDonald’s and other fast-food giants have done so well. The company’s commercials aim to take on a social issue rather than attracting customers.

I also do not see Chipotle breaking in to the international market smoothly. For one, its cheap burritos won’t be cheap in the Latino food markets. Its Tex-Mex culinary offerings have never gelled with the European crowds and I think its giant burritos may just be too big for the side-dish-specialized Asian market.  Nonetheless, the company won’t be falling off anytime soon. Although I do not see it mirroring the rise of the last five years, there may just be enough room for this company’s burrito to get bigger.


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