When Bears Give Way to Bear Hugs

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

I have been a Chipotle Mexican Grill (NYSE: CMG) bear for quite some time.  It's not that I didn't believe in the business.  It's not that I didn't believe in the food.  It's not that I didn't believe in the growth.  I quite simply didn't believe in the price to earnings ratio that they were waving around.  They were priced to destruction in my mind, and I was waiting until just before third quarter earnings to initiate some put options, because I can predict the future you see, and Chipotle's bad news would come in the third quarter...obviously.  Well, the analysts expectation miss came in the second quarter, and I watched shares plummet the way I thought they would a quarter later.  (And this children, is why we never ever, ever try to time the market)

So, as it turns out, God Almighty is still the only One who can predict the future.  I continue with my 50/50 odds.  

Now that share prices have dropped, this stock has wrapped this bear in a tight bear hug.  I've been hugged so hard that I have actually turned into a bull.  Let me share my Chipotle conversion with you.

P/E is down to earth

The P/E was a really big deal to me before.  Growth is one thing, but there is a limit as to what is a reasonable P/E ratio, and it has nothing to do with share price.  LinkedIn Corporation (NYSE: LNKD) has been at the top of my no-no list now for awhile.  Nothing justifies a near 900 P/E ratio in my mind, not even LinkedIn's incredible growth.  Facebook (NASDAQ: FB) has fallen from on high, but not far enough in my opinion.  With a P/E ratio over 100, I don't think they have numbers that are amazing enough to support that value (not even the 800 million users whom Facebook can't seem to monetize...)

Chipotle's P/E ratio is not the lowest one that you'll find out there.  It still in the mid-thirties.  But it is certainly reasonable given the company's rapid growth.  Overall sales have been going up by 20% a year for five years.  Net income growth is even higher.  They opened 55 new restaurants in the second quarter.  If you are not impressed, then let me say it this way: "Chipotle Mexican Grill opened a new restaurant about every 40 hours in the second quarter" (days in a year divided by four, divided by 55, times 24 hours in a day).  When you start comprehending this caliber of growth, a P/E ratio in the 30's is pretty darn good.

ShopHouse

Chipotle isn't content with just serving up more burritos.  Last September they started something new called ShopHouse Southeast Asian Kitchen.  It has nothing to do with burritos.  No, this restaurant chain is centered around Thai and Malaysian food (if you've never been to those countries, I can assure you that there are traditionally no burritos there).  They opened one in DC, and now they are opening a second with plans to make this another full-fledged chain.

So, if the brilliance of this move flew past you, I'll give you another chance to capture it.  The first ShopHouse location is across the street from a Chipotle Mexican Grill.  Yes, my friends.  Chipotle can continue to grow Chipotle, but can now also establish itself once again in all the same markets under its other name: ShopHouse.  Maybe the customers feel like burritos one day.  Chipotle gets their business.  Maybe the customers feel like egg-rolls the next day.  Chipotle gets their business.

To really get what is happening here, consider an example from privately owned Checkers Drive-In Restaurants, Inc.  I literally make myself sick on their hamburgers.  They are that good.  Checkers also has another restaurant chain called Rally's Hamburgers.  They sell exactly the same thing.  What is called the Checkerburger at one, is called the Rallyburger at the other.  They are identical restaurant's with different names.  It's not hard to imagine a restaurant operating an identical restaurant under another name, but this?  This would be like McDonald's making tacos.  This would be like the Waffle House opening a 24 hour seafood restaurant.  Egad brain, it's brilliant!

International

Chipotle has also been setting their sights on growing internationally.  London and Toronto have already been exposed to the south of the border cuisine.  Paris just got their first locale this past quarter.  Germany, sie sind neben...you're next!  What is also really cool about this international expansion is that they are growing the business debt free.  Yum! Brands (NYSE: YUM) is spreading like wildfire around the world  (Paraguay is getting their first KFC this year).  But Yum has accrued over $3 billion in debt to spur their growth.  While many would consider things to be reasonable with Yum's debt, isn't debt free even more reasonable by that logic?

And here's a Foolish thought.  If ShopHouse winds up being a huge success, then Chipotle Mexican Grill would have proved that they can serve up more than just one kind of cuisine.  Therefore, if Chipotle doesn't scratch the itch of a local international palette, then it wouldn't be unreasonable to assume that Chipotle could come up with another new restaurant chain that appeals better.  Remember, I'm no prophet.  I'm just citing this company's proven adaptability, and imagining what that quality could do for them as they set their sights on the world.

Conclusion

So, in the end, this is why I have left my den and decided to live on the ranch.  I was a bear for P/E ratio alone, but now that it isn't a factor anymore I have gotten closer to Chipotle to take a better look, and have converted into a full-fledged bull.  I don't pretend to know the future, but I hope that this article will also help you to see the light.


thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, Facebook, and LinkedIn. Motley Fool newsletter services recommend Chipotle Mexican Grill, Facebook, LinkedIn, 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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