The point of all of this is to show that in order to achieve an exceptional return with Chipotle, not only does the current growth trend need to continue unabated into the next decade, but the P/E ratio has to stay elevated as well. If growth slows down, which it inevitably will as the store count grows, the P/E ratio will decrease.
The reward is limited by the extremely high P/E ratio you’re paying today, and even the best case scenario isn’t all that great.
Cheaper growth
If you want to buy a fast-growing restaurant stock, a better choice is bakery/cafe Panera Bread Co (NASDAQ:PNRA). Panera is roughly the same size as Chipotle Mexican Grill, Inc. (NYSE:CMG) in terms of store count, but the stock is significantly less expensive. Panera Bread Co (NASDAQ:PNRA) trades at 26 times the average analyst estimate for 2013 earnings, far lower than Chipotle’s 39. Chipotle may grow a bit faster than Panera, but a 50% higher P/E ratio is likely not justified.
Panera is similar to Chipotle in that the company focuses on high quality ingredients, but Panera Bread Co (NASDAQ:PNRA) offers breakfast as well as other meals. Chipotle has reportedly been testing breakfast in some locations, but it’s unclear whether customers will view Chipotle as anything more than a place to get a giant burrito.
Analysts are expecting 18% annual earnings growth over the next five years for Panera, compared to 20% for Chipotle. That spread is certainly not large enough to warrant a huge premium, and Panera is clearly the better value.
Another option, although a slower growing one, is Yum! Brands, Inc. (NYSE:YUM). Yum! operates the Taco Bell, KFC, and Pizza Hut brands and is heavily focused on expansion in China and international markets. Yum! is a part of The Ultimate Dividend Growth Portfolio, and it’s the only company of the three mentioned which pays a dividend.
Yum! Brands, Inc. (NYSE:YUM) is branching out into the high-end market by testing the KFC Eleven concept. KFC Eleven will feature items such as flatbread sandwiches, rice bowls, salads, and boneless chicken, and the company will open a couple of stores over the next few months. This concept targets the same market that Chipotle and Panera target, and if successful, it could bring some more competition to the space.
Yum! Brands, Inc. (NYSE:YUM) trades at 23 times the estimated 2013 earnings, and analysts expect 11% annual earnings growth over the next five years. Yum! offers reasonable growth at a far lower valuation than Chipotle.
The bottom line
With every earnings beat, shares of Chipotle Mexican Grill, Inc. (NYSE:CMG) get more and more irrational, and eventually, the nosebleed valuation will correct itself. Even under the best case scenario, the return which can be achieved by buying Chipotle today is not worth the risk. Chipotle is a great company, and at a much lower price, the stock would be very attractive, but at the current price, buying Chipotle is a mistake.
The article Getting Real About Chipotle originally appeared on Fool.com and is written by Timothy Green.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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