Is Chipotle a value at $230?

This restaurant stock may not be as expensive as analysts say.

By TheStreet Staff Nov 8, 2010 11:56AM

Credit: (© David Zalubowski/AP)
Caption: Image: Chipotle Mexican GrillBy Jake Lynch, TheStreet


Fast-foot darling Chipotle Mexican Grill (CMG) has delivered three-year annualized gains of 19%.


Among the market's most beloved stocks, Chipotle commands a lofty book value multiple of 9.1 and a cash flow multiple of 25, premiums of 40% and 98% to restaurant peer averages. Few would argue that Chipotle is a value stock, but for those who believe in the company's growth prospects, it may still be a bargain.


The consensus on Chipotle is that it has surpassed fair value. Of analysts following the stock, 11 rate it "buy" and 12 rate it "hold." In fact, Chipotle is roughly 11% above analysts' median target.

More telling, it has run past every individual target, including the $195 projection of Deutsche Bank (DB) and the $215 prediction of Raymond James (RJF). Typically overzealous sell-siders are baffled by this momentum. But the stock just keeps chugging. It has advanced 53% since September. On Friday, the S&P 500 Index ($INX) rose 0.2% and Chipotle popped 2.8%.


The obvious question is: Who would be willing to buy Chipotle at such an absurd premium? Although the company still has solid growth prospects, they are largely predictable. Chipotle doesn't franchise its restaurants and has clearly stated that it will open 135-145 new restaurants in 2011.

And comparable-store sales, while impressive at 8.3% in the latest quarter, can't grow ad infinitum, since the comps just get harder and harder to exceed. Recent growth catalysts? Founder Steve Ells plans to open one, just one, Asian concept restaurant in 2011. Not accretive.


But by playing with growth rates and expansion prospects, we see that Chipotle may not be as overvalued as it appears. A new tool by Trefis, a research company focused on the product breakdown of publicly traded companies, shows the assumptions underlying Chipotle's stock price and how its growth rates could materially affect the equity's trajectory. The charts are adjustable, so feel free to manipulate the inputs to see how they affect the stock.

As you can see, Trefis is pessimistic about Chipotle. Modeling the business on a cash-flow basis, it values the stock at $139, suggesting that it is 40% past fair value. However, assumptions are somewhat bearish. Trefis assumes that Chipotle's EBITDA margin will decline steadily in coming years, despite the fact that it has nearly doubled since 2005.


Trefis forecasts that Chipotle will add 100 restaurants a year on a going-forward basis, which may be pessimistic. If you ratchet up Chipotle's restaurant growth to say, 200 a year, equal to four per U.S. state, a reasonable assumption, then its stock price jumps considerably.


Trefis's declining EBITDA margin is predicated upon higher marketing and labor costs amid the economic recovery. But Trefis predicts steady growth for average spend per visit due to menu price increases, stemming from rising ingredient costs.


The greatest point of contention regarding Chipotle is how quickly it will be able to add restaurants. Arguably, rapid expansion contradicts management's central philosophy of strict brand and quality control. Since Chipotle owns, but doesn't franchise, its restaurants, it must oversee every opening.

Still, there are potential catalysts for the stock, including a menu expansion or an overseas venture. The Trefis forecast is based upon Chipotle's last 10-Q so the cash tally is off. Adjust for the $297 million of net cash on Chipotle's balance sheet and you have further justification for its nearly $230 stock price.


Is Chipotle too expensive? Or are Chipotle's long-term growth prospects worth every penny? Mr. Market is certainly optimistic. Feel free to add your own forecasts using the Trefis charts or weigh in on the stock's valuation in the comments section.


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