What's Not To Love About Chipotle?
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Is Chipotle Mexican Grill (NYSE: CMG) a bit too authentic?
Our government thinks so! A spokesperson for Chipotle said, “The US attorney's office is conducting an investigation into possible criminal securities law violations relating to our employee work authorization verification compliance and related disclosures and statements.” Apparently, Attorney General Eric Holder was served the wrong hot sauce on his burrito. All kidding aside, this is a negative catalyst for Chipotle that may bear directly on share value as the investigation unfolds. Today we’ll analyze Chipotle from a value investor’s perspective and compare it to a few of its rivals.
Chipotle has a market cap of around $13 billion and trades at about $406 per share. The twelve month trailing price to earnings ratio is 55.84 and the price to earnings growth ratio is 2. Price to book is 10.71. As a value investor, I am somewhat appalled by the fundamentals and, suffice it to say, Chipotle is not a value stock, but I’m committed to this analysis. Chipotle’s return on equity is rather impressive at 22.75%. No less impressive is quarterly year-over-year revenue and earnings growth which clock in at 25.8% and 35.1% respectively. The debt to equity ratio is a stunning 0.31 and the current ratio is better than the benchmark by a factor of more than 4, posting at 4.43.
Although Chipotle pays no dividend, its balance sheet suggests that it could if the board chose to do so. Revenue, earnings and shareholder equity have been steadily increasing year-over-year since at least 2009. Chipotle reminds me of Amazon.com in that both have an extremely high price to earnings, price to earnings growth ratio, price to book and stellar year-over-year revenue growth. What sets Chipotle apart and garners my respect is that unlike Amazon, Chipotle’s earnings growth has risen year-over-year as well. That said, Chipotle may not meet the definition of a value stock, but it is easy to see that the stock has investment value.
A FINVIZ.com search revealed 4 additional restaurant stocks with high price to earnings ratios and I want to look to these for comparison. First, Wendy’s (NASDAQ: WEN), which sports a price to earnings ratio of 84.53, a price to earnings growth ratio of 2.15, and a fractional price to book of 0.88. Wendy’s trades at just over $4 per share and has a market cap shy of $2 billion. Wendy's return on equity is nothing short of tragic at 1.58% and year-over-year revenue is flat. Wendy’s has lost money in two of the past 4 quarters. The debt to equity ratio is 174 basis points higher than it should be with a disproportionately high current ratio of 2.21. The mean recommendation for the stock is 2.7 which I view as generous.
Dunkin' Brands (NASDAQ: DNKN) is up next. It trades at roughly $33 per share and its market capitalization is $4 billion. Dunkin’ has a trailing twelve month price to earnings ratio of 70.21, a price to earnings growth ratio of 1.59 and a price to book of 5.26. Return on equity for Dunkin’ is not quite as feeble as Wendy’s, reported at 11.69%. The income statement shows modest but steady revenue growth over the past 3 years but earnings have been largely flat. The balance sheet shows a steady increase in cash and cash equivalents over the same time period and stockholder equity was finally in positive territory for the fiscal year ending in December, 2011.
At the end of the day, however, Dunkin’s debt to equity ratio is still excessive at 196.06 with a current ratio of 1.39. Dunkin’ is paying a dividend which yields 0.9% translating to a payout ratio of 27%. Dunkin’ has opened its first of ten stores planned for New Delhi, India by the end of March, 2013. Although a positive catalyst for the stock, I question the headway Dunkin’ will make against Starbucks, which plans to open some 50 stores beginning in September, not to mention India’s own Café Coffee Day with more than 1,200 stores, and plans to have as many as 2,000 stores by the end of 2014.
P.F. Chang's China Bistro (NASDAQ: PFCB) has a price to earnings ratio of 43.13 but that hasn’t prevented it from becoming the target of a $1.1 billion buyout bid from Centerbridge Partners. The proverbial fly in the ointment is a suit filed by investor Helen Coyne which alleges that Directors allowed Centerbridge to structure the buyout in a way that is likely to allow it to be approved without a shareholder vote. The buyout also unfairly rewards company insiders who stand to receive a total of $17.5 million in “golden parachute compensation” under the deal.
Benihana (NASDAQ: BNHN), with a price to earnings ratio of 32.26, is also the target of a buyout bid at $16.30 per share. This may soon be the target of litigation as well. The investigation by the law firm of Levi & & Korsinsky, LLP concerns whether the Benihana’s Board of Directors breached their fiduciary duties to stockholders by failing to adequately shop the Company before entering into this transaction and whether Angelo, Gordon & Co. is underpaying for Benihana shares, thus unlawfully harming Benihana stockholders. At least one analyst set a price target for Benihana stock at $17.30 per share.
Private equity firms have been gobbling up struggling restaurants at a heady pace. Maybe your favorite eatery is next!
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.