Easy on the hot salsa, Chipotle
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No one can deny Chipotle (NYSE: CMG) can make a mean burrito. But is the stock worth more than $400? The stock has powered up almost 20% since the first of the year in an almost unbroken line:
What has happened in that time to necessitate such a clean rise? Q1 added 32 new stores to the standing 1,257 in the US (compared with 12 in the same quarter last year), and same store sales increased by 12.7% (compared with 12.4% last year). In the same period last year the stock leaped up around the same amount (~22%), but in much choppier trading. In Q1 2010 the rise was tempered with shake outs of "lesser" investors, that is, those that can't afford (or stomach) sharp drops. This leaves a much higher quality investor in it for the long term. Q1 2012 has not had that same shaking out period, so I am expecting this most recent drop to pick up the pace as investors that have held on since the first of the year start to take profits.
Chipotle is a great company, so where will the drop end? I see a floor around $360-$370. After that it will be interesting to see where growth will come from. People travel specifically to Chipotle, and anyone who has been to one during lunch on a weekday will know they are not hurting for customers. The market is far from saturated with only 1,257 stores, but the market does seem to be satisfied. Stores now enjoy about $2M a year each in revenue, and new stores will undoubtedly eat into this. I do not see major growth coming any time soon from ShopHouse, their Washington, DC only store serving Southeast Asian food. Thai and Vietnamese cuisine is still fairly exotic to the American dining public and it is going to take time to scale the concept.
The picture gets a little bleaker when comparing Chipotle to McDonald's (NYSE: MCD) (the investor that grew the company from a Colorado-only David to a 500 store Goliath). McDonald's same store sales growth for Q1 2012 was 8.9%, remember Chipotle was 12.7%. One would think that a company at Chipotle's growth stage could do a little better than that. Additionally, Chipotle's P/E stands at 57, and industry average is 20 (McDonald's is 18). All this points to the reality that Chipotle is too hot right now for my liking, and I would like to see a pullback before getting involved.
TheLaowai has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services recommend 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.