Just twelve short months ago, Chipotle Mexican Grill, Inc. (NYSE:CMG) was widely considered to be the “Amazon” of the fast-casual world—a highflying, momentum-driven stock that ignored the sentiments of most value investors. After surpassing the $350 mark in early January of 2012, shares of Chipotle rose as high as $442.40 in anticipation of that year’s first quarter earnings report.
In late July, when the company reported second quarter revenue growth that was a bit lighter than expected, the markets reacted swiftly, shaving off more than 20% of Chipotle’s value over the period of one trading day. Pre-selloff, the stock traded at a premium even its mother couldn’t love—a P/E (54x) more than double that of its industry’s average (21x) and a PEG multiple near 1.8. Remember these figures, we’ll go back to them.
By the end of the next quarter (see our full coverage of the situation), investors’ sentiment toward the stock actually turned sourer, as Chipotle’s miss grew a bit wider. Despite notching Q3 EPS growth of 20% year over year, the company still missed the Street’s earnings estimates by two cents on the back of a sub-par top line yet again. While Chipotle did open 36 new locations in the period, higher operating costs across the board were also to blame for the woes.
Now, over the past month, CMG shares have actually risen 6.7%, an appreciation that has softened the losses of hedge fund backers like Patrick McCormack’s Tiger Consumer Management, Philippe Laffont’s Coatue Management, Jim Simons’s Renaissance Technologies (see all of Jim Simons’s favorite stock picks here) and Steven Cohen’s SAC Capital. Here’s a full list at the smart money’s interest in Chipotle, but it’s worth mentioning that even at the end of the third quarter, there were still some high-profile investors bullish on the company’s prospects.
The obvious question that remains is: what are reasonable expectations for investors staring Chipotle in the face at the moment?
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:
Is Chipotle a Good Investment After Missing Earnings?
Disclosure: I have no positions in any of the stocks mentioned in this article
