At 28 times next year’s earnings and a PEG near 1.6, the stock is much more fairly valued at the moment, though one piece of discontent rests with Chipotle’s slowing growth. Over the past half-decade, the company’s bottom line averaged 39.6% expansion each year. Looking ahead, the sell-side forecasts this annual growth to be 21%-22% through 2017, a little over half of the level investors are accustomed to.
Still, it’s important to remember that this is a characteristic experienced by all maturing companies, and Chipotle is no different. The rational way to determine the stock’s potential is to stack its growth prospects up against peers like McDonald’s Corporation (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), Brinker International, Inc. (NYSE:EAT) and Panera Bread Co (NASDAQ:PNRA).
According to Wall Street’s average estimates, McDonald’s (8.9%), Yum (13.4%), Brinker (13.0%) and Panera (18.7%) are all expected to grow their earnings by less over the next five years in comparison to Chipotle, and only Brinker’s growth is trending in a positive direction.
While Yum (1.5) and Brinker (1.3) trade at PEGs slightly cheaper than Chipotle, McDonald’s earnings growth is actually trading at a 20% premium in comparison to its fast-casual competitor.
Obviously, relative valuations are not the only way to determine a company’s investment prospects, but in Chipotle’s case, they are particularly important.
Chipotle does report its fourth quarter financials on February 5th, and the numbers to watch are the Street’s revenue estimates of $691 million and its EPS estimates of $2.10. If the fast-casual chain is able to hit these forecasts, it should at least partially be a result of depressed avocado and dairy costs.
Heading into its 2013 fiscal year, most analysts are expecting moderate menu price increases of a couple percentage points as well, so there are a few bullish trends working in Chipotle’s favor.
Over the longer term, most of the growth estimates we’ve discussed don’t even take into account the effect that a successful rollout of Chipotle’s ShopHouse Southeast Asian Kitchen chain will have, which can act as a “carrot,” so to speak, pulling shares of this stock higher.
On the whole, Wall Street holds an average price target on CMG of $318.67, which represents a modest 7%-8% upside from current levels; it’s easy to see why the stock is an essential part of many hedgies’ portfolios. To continue reading about Chipotle, check out our coverage on Insider Monkey. For more related articles, continue reading below:
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Disclosure: I have no positions in any of the stocks mentioned in this article
