Chipotle or Red Robin path
For restaurants, it can be difficult to find comparative public stocks for analysis. In this case, Chipotle Mexican Grill, Inc. (NYSE:CMG) offers a view of a Mexican chain with a somewhat similar price point while Red Robin offers a similar full-scale restaurant. Both are even more compelling considering the close location with the visited restaurant. These two stocks also offer glimpses of what happens when growth paths create different outcomes.
Though Chipotle Mexican Grill, Inc. (NYSE:CMG) offers more of a fast-casual Mexican concept than a full-service restaurant, it does offer insight into what the valuation of a successful operation can maintain. In the latest quarter, the company had 1,458 stores with revenue growing 13% to $727 million. More importantly, the stock has been able to maintain a multiple of over 3 times revenue even with a valuation of $11 billion. Revenue growth expectations remain strong at over 15% during the next couple of years. The stock maintains a relatively high forward multiple of 28 times estimates and during the heyday of growth it had valuations comparable to that of Chuy’s Holdings Inc (NASDAQ:CHUY) that sits around 48 now.
As mentioned above, Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) though more of a burger joint competes in the same general areas for a similar customer price point. Chuy’s Holdings Inc (NASDAQ:CHUY) though hopes to not take the same path as Red Robin. The burger joint saw its stock max out back in 2005 at over $60 and is only now re-approaching that level eight years later. Though Red Robin has nearly 10 times the store base it has a similar market cap. With revenue expected to exceed $1 billion this year, the concept only trades at a market cap of $764 million and actually trades at an expensive forward multiple of 21 times.
Any investors discovering Chuy’s Holdings Inc (NASDAQ:CHUY) back around the IPO price are probably celebrating at the current prices and maybe even unloading stock like the shareholders from the secondary offerings. For other investors decisions have to be made as to whether the company will take the growth path similar to Chipotle or max out like Red Robin did at these valuation levels. The exiting shareholders clearly think the valuation could be maxing out even though the company only has stores in nine states with significant growth opportunities ahead. Investors might be wise to load up on dips, but it’s very noteworthy that the stock hasn’t dipped at the end of June during the taper tantrum selloff.
Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Red Robin Gourmet Burgers. The Motley Fool owns shares of Chipotle Mexican Grill. Mark 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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