Here’s Why Chipotle Will Hit $360 By Christmastime

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

On the 16th of last month, we told you to “Stay Way from Chipotle, It’s a Growth Trap,” with the reasoning that the company’s earnings were trading at a ridiculously expensive premium, even by its standards.  We warned “the risk of a negative revaluation looks to outweigh upside potential at current price levels”, which were then flirting with the $400 mark.  Based on our calculations, a share price of $360 looked like a much fairer valuation. Just four days later, shares of Chipotle Mexican Grill (NYSE: CMG) fell 21.5%, as weaker than expected second quarter revenue growth spooked the markets quite a bit.  When the dust settled, the stock had dropped below $300 a share for the first time since last summer.  In light of this massive selloff, it appears that the markets may have overreacted.  Similar to our most recent restaurant industry pick (full report here), there is a definite buying opportunity here.

Now, what the bears fail to tell you about Chipotle’s Q2 report is that earnings jumped 61% year-over-year, and the Street is still expecting a year-end EPS of $9.02, up 33.4% from the $6.76 it reported in 2011.  By the end of 2013, this consensus rises to $10.91, which would be an increase of nearly fivefold in a half-decade.  This two-year expected earnings growth (30.7%) is higher than the likes of Panera Bread (NASDAQ: PNRA) at 23.5%, Brinker International (NYSE: EAT) at 17.9%, Yum Brands (NYSE: YUM) at 14.8%, and Qdoba owner Jack in the Box (NASDAQ: JACK) at -0.6%. But wait, there’s more.

In its current price range around $300, shares of CMG are trading at a Price-to-Earnings ratio (36.2X) below its own 5-year (41.1X) and post-IPO (41.7X) averages.  As we’ve mentioned before, the company’s earnings premium over the S&P 500 has historically averaged 172% since going public in 2006.  Currently, shares appear much cheaper, trading at a 146% premium.  Compared to its competitors PNRA (+37%), EAT (+65%), YUM (+11%), and JACK (+32%), which are all trading at levels more expensive than their historical averages, the attractiveness of Chipotle’s current valuation can been seen in full light.

As of its most recent count, Chipotle operates roughly 1,300 restaurants in the United States, the UK, Canada, and France.  By the end of 2012, this number is expected to eclipse 1,400, with similar growth over the next year.  Now, it is obvious that there can only be so many Chipotle restaurants in the world, but you’d better believe CEO Steve Ells has something up his sleeve.  Enter ShopHouse Kitchen, the company’s newest foray into the fast-casual market.

In what seems like a hybrid between Flat Top Grill and more traditional Asian dining, ShopHouse offers a bevy of customizable rice and noodle bowls, complete with curries, vinaigrettes, and any other sauces you can imagine.  With its first two locations in Washington D.C. opening to splendid reviews (here’s a video), the rumors are swirling about a potential expansion into similar sized markets like Chicago, New York, and Los Angeles.  Considering its potential to join Chipotle’s original brand as the next fast-casual rock-star, this is definitely an important situation to keep up on.  Check back here for more updates.

Assuming that the company hits its year-end earnings estimates, fairly valued shares of CMG can reach $360 by Christmastime.  Looking to 2013 forecasts, this upside stretches to $415, making it a real possibility that the stock will regain its losses within the next 12-16 months.  WealthLift’s Sentiment Index rates Chipotle as a moderate buy, with the majority of the community’s users placing an “overperform” rating on the stock.

Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article.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.

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