Chipotle Mexican Grill, Inc. (CMG): This Restaurant Chain Is a Little Too Expensive

Page 1 of 2

With sales up almost tenfold over the past decade, Chipotle Mexican Grill, Inc. (NYSE:CMG) is unquestionably one of the fastest-growing food-service companies in the market. With about 1,400 restaurants currently, mainly in the U.S., Chipotle still has plenty of room for growth, particularly in international markets, an area the company is just beginning to explore. My only concern is that maybe a lot of the growth potential of Chipotle is already priced into the stock, that is, maybe the market is just a little too optimistic. Is there still room for Chipotle to rise, or could you put your investment dollars to better use elsewhere in the fast-food business?

Chipotle Mexican Grill, Inc. (NYSE:CMG)

The growth of Chipotle

As the revenue chart shows, Chipotle Mexican Grill, Inc. (NYSE:CMG) has grown at a tremendous rate over the years and has successfully earned a reputation of offering high-quality food at fast-food prices. The company prides itself on only serving naturally raised meats and fresh produce, which are part of its ‘food with integrity’ philosophy.

Chipotle is part of a very rapidly growing segment of the food-service industry known as “fast casual,” which reflects the shifting tastes of the American public toward healthy food at low prices that is served quickly. Over the past several years, fast-casual restaurants have seen their sales grow at double-digit rates as opposed to other restaurant categories, whose sales have averaged a 1% to 2% decline in recent years.

What is most remarkable is that Chipotle Mexican Grill, Inc. (NYSE:CMG)’s sales growth has not slowed down at all, even over the peak recessionary period between 2008 and 2010. In fact, the chart above indicates that revenue growth actually accelerated during that time period.

My main worry with Chipotle is that too much growth may be priced into shares right now. Chipotle trades at just under 40 times trailing-12 months earning, which by itself isn’t too uncommon for a rapidly growing company. Chipotle is projected to earn $10.62 per share this year, rising to $12.72 and $15.40 in 2014 and 2015, respectively. This translate to average annual forward earnings growth of 20.8%, which is great but I’m not sure if it justifies such a high valuation.

I’m also a bit skeptical about how long Chipotle Mexican Grill, Inc. (NYSE:CMG) can keep up this growth rate. As more and more of the company’s restaurants open, it will become more difficult to sustain the high growth. For example, for 20% growth, the company would have to open 280 stores this year based on the current store count. This seems manageable, but next year the company would need to open 336 stores to simply maintain the same rate of growth. You can see how this rate of expansion will get more difficult over time.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!