Is Chipotle a Buy Now?
Pam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A couple weeks before Chipotle Mexican Grill, Inc. (NYSE: CMG) announced their Q2 earnings, I wrote an article questioning their valuation. I concluded then that they were fairly valued given a 12.7% growth in same store sales (SSS) relative to their peers, Panera Bread (NASDAQ: PNRA) and Qdoba Mexican Grill, a unit of Jack in the Box (NASDAQ: JACK). On July 19th after the markets closed, Chipotle reported SSS growth of 8.0%. While impressive, it did not justify the 55.6 P/E that their $403.86 closing price that day implied. The following day, they closed down 22% and their multiple contracted to 38.5. As of this writing, it stands at 36. Is that still too high? Given Chipotle's full year guidance, its competitors' guidance and the new, lower-priced competing offerings from Taco Bell, a unit of Yum! Brands, Inc. (NYSE: YUM)? I say yes and I will explain why.
Same Store Sales (SSS) Growth Key to Chipotle's Share Price
Investors have valued Chipotle more highly than Panera or Qdoba because of their much higher SSS growth. In April, Chipotle reported 12.7% vs. Panera's 7.5% and Qdoba's 3.8% (in May) and at the time of my previous article, their P/E's were 52.7, 28.2 and 17.1 (JACK's P/E), respectively. In updating my original graph, I averaged the SSS growth figures for the last 3 quarters and compared them to the average P/E's based on the opening share prices on the next trading day following each company's earnings reports. The following graph, once again, shows an excellent linear correlation between P/E and SSS growth.
Guidance from Chipotle and Peers Regarding Same Store Sales Growth
In their press releases for their latest earnings reports, Chipotle, Panera and Qboda provided the following guidance:
| Ticker | Latest Guidance | Average SSS YTD | Implied SSS for Rest of Year | FY 2012 SSS Growth |
| CMG | Mid-single digits or 4-6% | 10.4% | -2.3-1.6% | 4-6% |
| PNRA | Q3: 5-6%; Q4: 4.5-5.5% | 7.3% | 4.8-5.8% | 6-6.5% |
| Qdoba | Q4: 1-2%; FY 2.5-3% | 3.5% | 1-2% | 2.5-3% |
The first thing to note is that Panera and Qdoba are expecting SSS to be lower for the rest of this FY. Panera's updated guidance leads to an expectation of 6-6.5% overall SSS growth for 2012. Qdoba announced their expectation of 2.5-3% SSS growth for FY 2012.
Chipotle's guidance is unchanged from what they provided in their 2011 10-K, which is typical for them. However, if accurate, at the low end, it would suggest a decline of 1.3% in the second half of 2012 and, at most, a 1.6% increase. As I noted in my previous article, over the last five and a half years, Chipotle has consistently met or beat their SSS guidance. However, from the above graph, just meeting the high end of their guidance of 6% SSS growth could cause their stock to drop about 20% from current levels. By comparison, if Panera meets their guidance, I would expect little change in their share price.
Competition from Taco Bell's Cantina Bell Menu Offerings
On July 5th, Taco Bell rolled out their new Cantina Bell Menu nationwide. There have been numerous reviews, both positive and negative, but Zagat put it clearly:
Overall Verdict: For practically half the price, the Cantina Bell menu is a definite value, but you get what you pay for, and the overall quality and taste of Chipotle still has a slight edge over Taco Bell.
Two takeaways here: 1. Taco Bell's Cantina Bell offerings are about half as expensive as Chipotle's; 2. taste-wise, Chipotle has only a slight edge over Taco Bell. Zagat's review was written only one week after Taco Bell introduced their new menu. I would expect them to tweek it to minimize the “slight edge” Chipotle currently has in taste. The expectations for slower sales in the second half of this year suggests these companies smell an economic slowdown.
Bottom Line
Chipotle's stock has a greater potential for a large decline in the near-term than Panera's due to investors' high expectations for their SSS growth despite management's guidance. Although all 4 companies outperformed the S&P 500 during the Great Recession, with Chipotle rising 78% and besting Panera's 14%, Yum!'s 32% and JACK's 47% gains, in a coming economic downturn, Chipotle faces new competition from a large competitor offering food just slightly less tasty for half the price—a situation they did not face during the Great Recession. If the majority of Chipotle's customers are themselves “recession-proof,” they may remain loyal. If not, money may talk and they may walk to Taco Bell. Those investing in Chipotle today need patience, a long-term view and the willingness to accept some big dips if their SSS growth slips.
p366 owns shares of Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Motley Fool newsletter services recommend Chipotle Mexican Grill, Jack in the Box, Panera Bread, 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.
