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

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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.

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