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Chipotle Mexican Grill, Inc. (CMG) Looks Expensive Compared to Its Peers

Chipotle Mexican Grill, Inc. (NYSE:CMG) is a company that is growing rapidly. Earnings per share have grown 32% over the last five years and are penciled in to grow a further 29% this year. Indeed, with EPS and revenue up 16.3% and 15.9%, respectively, in the first six months of this year alone, the company’s lofty valuation looks to be justified.

Having said that, it would appear as if the company is expensive, even by high-growth standards. Trading at 32 times forward earnings, and after accounting for growth, the company is trading at a PEG ratio of 1.1, indicating that the stock may just offer growth at a reasonable price. However, when compared to peers on other metrics, Chipotle Mexican Grill, Inc. (NYSE:CMG) appears to be rather expensive.

For example, on a price-to-sales ratio, a more telling metric as there is no influence by on-off and non-cash items like EPS, Chipotle Mexican Grill, Inc. (NYSE:CMG) trades at a price-to-sales ratio of 4.5. Meanwhile, larger peers McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) trade at price-to-sales ratios of 3.6 and 2.5, respectively.

Still, considering that both McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) trade at PEG ratios above 2.0, we can assume that their growth is not worth paying a premium for.

In comparison to fast growing peers

On the other hand, Burger King Worldwide Inc (NYSE:BKW) and Dunkin Brands Group Inc (NASDAQ:DNKN) are two companies that are set to grow at a much faster rate than Chipotle Mexican Grill, Inc. (NYSE:CMG) over the next year but still trade at a discount to Chipotle. In particular, Burger King’s 2013 EPS are expected to come in at $0.80, up 70% from $0.47 reported in 2012. Additionally, Dunkin Brands’ EPS are expected to come in at $1.53, up 60% from $0.96 reported in 2012.

Both Burger King Worldwide Inc (NYSE:BKW) and Dunkin Brands Group Inc (NASDAQ:DNKN)’ trade at forward P/E ratios lower than that of Chipotle Mexican Grill, Inc. (NYSE:CMG) (24.6 and 28.0, respectively). Moreover, both Burger King and Dunkin’ are more profitable than Chipotle with operating margins of 30% and 24%, respectively, compared to Chipotle’s 17%.

Chipotle Mexican Grill, Inc. (NYSE:CMG)Still, there are some signs that Chipotle Mexican Grill, Inc. (NYSE:CMG) is worth a premium but not as much as its current valuation gap suggests. For example, Chipotle has a strong cash conversion ratio, with 48% of EBITDA being turned into free cash flow. However, when compared to Dunkin Brands Group Inc (NASDAQ:DNKN)’ cash conversion ratio, which is also 48%, it does not seem like Chipotle deserves this premium. Burger King Worldwide Inc (NYSE:BKW)’s ratio stands at 33%.

So overall, Chipotle Mexican Grill, Inc. (NYSE:CMG) has a lower profit margin, growth is slower and cash conversion is similar to peers Burger King Worldwide Inc (NYSE:BKW) and Dunkin Brands Group Inc (NASDAQ:DNKN)’; but the company still trades at a forward P/E of 32, a 47% premium to Burger King’s forward P/E of 21.7 and a 35% premium to Dunkin’s forward valuation of 23.7.

So why is Chipotle so expensive?

Well, for a start, Chipotle Mexican Grill, Inc. (NYSE:CMG) has a solid balance sheet with $472 million in cash and short-term assets and almost no debt. Although, this could be considered by some to be a liability, as companies that stack up cash can be accused of not growing fast enough; high-growth companies usually spend lost of cash to grow rapidly and stay ahead of the game. Chipotle has a quick ratio of 3.1, which could indicate that the company is not reinvesting its cash as well as it could do as a ratio above 1.5 can be considered unhelpful.

That said, current assets cover total liabilities 1.3 times and a strong balance sheet is never a bad sign. On the other hand, the company is only achieving a return on assets of 5%, compared to Dunkin Brands Group Inc (NASDAQ:DNKN)’ at 15% and Burger King Worldwide Inc (NYSE:BKW)’s 5.5%, so once again, Burger King and Dunkin’ outperform Chipotle Mexican Grill, Inc. (NYSE:CMG) on a metric of return.

It appears that there is no immediate explanation for Chipotle Mexican Grill, Inc. (NYSE:CMG)’s expensive valuation and peers Burger King Worldwide Inc (NYSE:BKW) and Dunkin Brands Group Inc (NASDAQ:DNKN)’ could offer faster growth at a more reasonable price.

Foolish summary

There is no doubt that Chipotle Mexican Grill, Inc. (NYSE:CMG) is a strong company that is growing rapidly, boosted by a strong balance sheet, customer loyalty and a good product. However, the stock currently seems slightly overvalued in comparison to its peers, which offer the same if not stronger growth but at a more reasonable price. All in all, maybe Chipotle’s stock has gone ahead of the company and should be left to cool off.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill.

The article Chipotle Looks Expensive Compared to Its Peers originally appeared on Fool.com.

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