An Expensive Mexican Taste

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chipotle Mexican Grill (NYSE: CMG) recently reported its third quarter earnings results. In the third quarter, it achieved significant growth in both top line and bottom line. The revenue was $700.5 million, 18.4% higher than the same period last year. Its net income had year-over-year growth of 19.6%, from $60.4 million to $72.3 million currently. Diluted EPS was $2.27, marking an increase of 19.5% compared to Q3 2011.

Although CMG had a fantastic growth, it failed to meet Wall Street’s expectations. Zack’s Consensus Estimate was $2.30, 1.3% higher than its actual EPS. The analysts’ sales estimate was $703 million, but the company’s revenue came at 0.3% lower. Right after its earnings announcement, the company lost 15% of its market capitalization, equivalent to more than $2 billion. The share price dived from $285 down to $243. In the past 3 months, Chipotle has lost around 40% of its value in the stock market.

For the restaurant/retail business, comparable sales are an important operating figure. It is a productivity measurement, used to compare sales of a store/restaurant, which has been open for at least a year. Comparable sales of Chipotle increased 4.8% and 8.3% for the third quarter and for nine months respectively. Yum! Brands (NYSE: YUM) reported even higher quarterly comparable sales, 6% for both US stores and China markets. McDonald’s (NYSE: MCD) global comparable sales experienced growth of 1.9%, whereas analysts expected a 2.4% increase. MCD’s CEO Don Thompson said that the global comparable-store sales in October are “trending negative”, although the company hasn’t experienced a decline in its comparable sales in at least 8 years. Starbucks (NASDAQ: SBUX) had 6% comparable sales growth globally, and 7% in the US. So among the four, MCD had a lowest comparable sales, then the second lowest is Chipotle’s.

Steve Ells, its founder, chairman, and Co-CEO felt proud of the company’s vision and culture: “We have always believed that good food should be affordable and accessible to everyone. We’re delighted that our continuing efforts to serve the very best food made from high quality ingredients raised with respect for the animals, the environment, and farmers and that are freshly prepared using classical cooking techniques is resonating with our customers. This is helping us realize our vision of changing the way people think about and eat fast food.”

In February and March this year the CEO sold $46.75 million of his Chipotle’s stock at the price of $382-$389. Jack Hartung, the CFO and Montogomery Moran, the co-CEO sold millions of Chipotle’s stock in March and April at $370-$435 range as well.

Currently, CMG seems to be the most expensive franchise fast-food companies with 28.25x P/E, much higher than industry’s average of 19.68x, even after a significant decline. In addition, it is the only company, which doesn’t pay any dividend. The current dividend yield of MCD, YUM and SBUX are 3%, 1.9% and 1.4%.

My Foolish take

In the past, CMG has experienced phenomenal growth in both operating performance and its stock price for several years. Personally, I think CMG has been overvalued for quite a while now, and it is still overvalued. As John Maynard Keynes put it: “Markets can remain irrational a lot longer than you and I can remain solvent”, investors need to be rational, unemotional, and extremely patient. With no dividend, rich valuation, and heavy insider selling, I would not consider CMG for my portfolio at this moment.  

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Chipotle Mexican Grill, Chipotle Mexican Grill, McDonald's, Starbucks, and Yum! Brands. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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