Chipotle: Still Room To Run!

Matthew 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) has been one of the best growth stories the restaurant industry has seen in a long time.  Since first trading publicly in 2006, the share price has risen from $22.00 to the $300-range as of this writing, or a gain of 1280% in just over six years.  I should have listened to my mom who has been addicted to their food since Chipotle opened near her house in 2005!  Anyway, while I do feel it would be unwise for those who have been holding since the beginning to take at least some profits off of the table, I do think Chipotle has a lot of room to grow and is worth a look.  For those who read my posts regularly, I am rarely bullish on a company with a P/E ratio in the 30's, but this is a rare exception.


 

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Chipotle’s restaurants serve tacos, burritos, and salads made with fresh ingredients in a fast-casual environment.  As of the end of 2011, Chipotle operated 1,230 restaurants; a number that I expect will have grown when the company reports its 2012 results next Tuesday. 

There is no real direct competitor to Chipotle; however, I would say the closest is Yum Brands (NYSE: YUM) and their Taco Bell restaurants.  While it is Mexican-style food, in terms of quality and freshness, there is a world of difference between the two brands.  Also, people tend to clearly prefer one brand or the other.  Those who prefer Chipotle’s style of food don’t really go to Taco Bell anyway.

McDonald’s (NYSE: MCD) is also a competitor for the fast-food dollar, and are becoming more direct competition as they have been gradually shifting to more fresh, wholesome ingredients on their menu.  It is worth noting that McDonald’s held a large share of Chipotle until late 2006, when they decided to end their ownership interest in other businesses and focus on their own.  I wonder if they regret this move, since Chipotle was trading for a small fraction of its current value at the time McDonald’s got out…

Chipotle has had incredible success continuously over the past decade, growing both revenues and earnings at amazing rates, even during the terrible economic period of 2008-2010, during which time Chipotle’s revenues increased by 37.8% and earnings increased by 139%.  Not bad during the worst climate for growing a business in any of our lifetimes thus far.

 

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It is worth noting at this point that Chipotle (as well as McDonald’s and Yum) are very recession-resistant companies, growth aside.  During tough times, people who normally would eat at more upscale restaurants are forced to seek lower-cost options like Chipotle.  During good economic times, those people who couldn’t afford to eat out during the recession once again have money to spend going out to eat.  In other words, although the particular clientele may shift, there will always be business for low-cost foodservice establishments.

Chipotle does trade at a high valuation right now, which I feel is more than justified.  The stock currently trades at 34.8 times 2012’s earnings of $8.78, which are projected to increase to $10.27 and $12.38 in 2013 and 2014, according to consensus estimates.  So, with a projected annual average earnings growth rate of 22%, not to mention about a half billion dollars in cash and virtually no debt, Chipotle’s valuation is more than justified. 

With a low valuation, cash in the bank, and almost unlimited room to grow (Chipotle barely has any international presence thus far), Chipotle is certainly worth a look.  During the earnings call next week, pay attention to the company’s plans for growth over the next several years, as well as growth in existing-store sales, which have been in the 10% range in recent years.


KWMatt82 has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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