Explain CMG's Valuation to Me
Mod Note (Andy): Best of Eddie, this was originally posted September 2013. One of the comments in the thread is great: "I'd also be worried about their supply chain if I were an investor".
Who doesn't love Chipotle? Even the one here in Paris, which sucks compared to its American counterparts, is halfway decent. The company is obviously doing everything right and has appealed to the burgeoning trend of fresh (relatively) healthy fast food in America. They're even actively attacking factory farming, which makes them aces in my book.
But seriously, what the f**k is up with their stock price?
Are you really going to tell me that a 45 P:E is reasonable for a restaurant? I want to own Chipotle, I really do. But there ain't no way I'm paying a multiple like that for a fast food joint. What am I missing? Somebody help me out here. Because CMG looks like a screaming short to me.
But then I look at this chart:
And I think to myself that shorting that would be suicide.
So what am I missing? Why is this stock such a juggernaut? What's the justification for such an ungodly multiple (at least as far as the restaurant industry is concerned). With an average industry P:E of 20, is CMG really more than twice the company all its competitors are? Or is this setting itself up for an epic short a la NFLX?
Is a PUT strategy like this the smart play here? Admittedly, less than a 3% annual return isn't very exciting.
Help me out here, guys.
I go to Chipotle at least 4 times a week (not proud of it, but I'm too lazy to make lunch every night after long days), and 95% of the time the line is almost to the door. These places are factories. Cash cows. It would be interesting to look at some metrics that involve stores per square mile in cities with populations above 100,000, because I'm willing to bet they would have a much lower store count than a lot of their competitors. There might be some serious growth potential still.
I looked at Chipotle after Einhorn's presentation ("Taco Bell is cheaper!") and again after Gundlach's commentary ("nearing maturity, multiples should be lower").
And I have to agree. The valuation is frothy. I sure wouldn't go long CMG. But I wouldn't short it either. It's not a broken business. I don't perceive it to be a fad - it is basically sanitized Mexican food with feel-good "organic" ingredients.
The only real catalyst for a share price decline would be repeatedly missing estimates. And that's not a good enough thesis for me. Many companies are trading at ridiculous multiples, and many of them have far more questionable business models than CMG. Steve Ellis has not made ridiculous Elon Musk-esque promises. So really it is just a question of whether they can continue to meet/beat the street.
Spot on. I think top-line growth will be the "catalyst" for decline. It just isn't sustainable much longer in my view. Competition is high, options are many, and saturation is going to appear.
But, I wouldn't short the stock, other than OTM puts. Then again, that is always my preferred approach.
how about the valuation on that place in Mouffetard, def going to eat there when i go back to the area this week
Bocamexa? I love me some Bocamexa... But Chipotle though... Burrito bowl... so delicious
Actually took @AndyLouis to Chido on the other end of Rue Mouffetard. I think the burrito that guy twisted up for me was the only thing that saved my ass.
Not a financial wizard here by any means, but I assume a high P/E ratio means that the market thinks the company is currently undervalued and has room for growth, in this case, by a large amount? If that's the case, then I just don't see it. IMO, it's a mature franchise (yes, they are opening new locations, but not at a really breakneck pace). I don't know where they could expand internationally that would justify that valuation, and I'd assume that central/south america would be very difficult, if not impossible, to break into.
I'd also be worried about their supply chain if I were an investor. Not all of their food comes from a proprietary source, leaving them exposed to rises in the price of food commodities. CMG is more sensitive to a rise in food prices than some of the other chains, since they use higher quality ingredients. "Local" "Responsibly Raised" etc would, I assume, be more sensitive to increased production costs (feed, energy, etc) since they don't have the same economy of scale as larger farms, eg, Niman Ranch, do.
Disclaimer: No accounting/finance background, just my 1 som ($0.02). Please correct me if I'm wrong, I'd love to learn more about this stuff.
Not undervalued, a high P/E just means the market gives it a higher valuation than its bottom line would traditionally indicate. Basically some or all of the growth potential is priced into the stock.
Thanks CorpFinGuy. Would SB you if I had some.
So to be clear, the market thinks that CMG is worth 45x it's current valuation, which I assume to be it's book value, meaning that the market thinks CMG is worth 45x it's current book value?
Thanks CorpFinGuy. Would SB you if I had some.
So to be clear, the market thinks that CMG is worth 45x it's current valuation, which I assume to be it's book value, meaning that the market thinks CMG is worth 45x it's current book value?
I think the main growth opportunity is in other food genres. Chipotle basically invented a new quick service model that can be applied across other platforms, and they have the cash flow to fund and/or acquire new chains. Best of all, they won't get a lot of the negative push back from the public because they tout the fresh/healthy ingredients aspect.
I think eventually, Chipotle will have to introduce some new menu items or ingredients. Great food (which I think I'll have for lunch today), but after awhile, their menu seems a little stale.
I'm surprised no one has mentioned Shop house, the southeast Asian restaurant that Chipotle has started in the same model as it's Mexican stores. That seems to me a second growth engine which could keep it going even if the flagship stores stall out. Other than that, I can't think of much else that they have going for them valuation wise. I think personally you are asking the wrong question here Eddie. I think it is more about recognizing when sentiment turns against Chipotle and they have saturated the available markets with Mexican food which will eventually stall their growth. Again, I would think the hope is that the asian concept if it works out can mitigate that growth and keep pushing this thing higher.
The other thing to keep in mind is that probably helps the stock price is that it is a screaming short. Everyone can see that it should be shorted on any conceivable, rational valuation metric tied to a food industry stock. Therefore I would guess that any short will never work until the exact moment when everyone and their cousin thinks it will go to the moon and something random ignites a fire sale. If anyone figures out when that is, please let me know. I'm currently underperforming and would love to play catch up haha.
Short NFLX.
.
Bottom line: CMG is still pricing in the expectations of future earnings years in the future; the last twelve months (or even 1 yr forward) p/e just does not matter.
Let's look at some really simplified math to get a ballpark estimate of future earnings. In the LTM, Chipotle had on avg 1372 domestic stores and 8 international stores, for 1380 total. In LTM, revenues were 2.943 billon and net income was $298 million, or $217k per store. Same store sales are growing at 4% in revenues, but lets just assume net income grows 1% per year per store. CMG wants to grow their store count by around 45 total per quarter (fairly conservative), so by end of 2015, we are looking at 1502 (current store count) + 45*10 qtrs = 1952 stores. For simplicity lets say for the moment margins are constant, so net income per store at end of 2015 is about $222k. That means annualized net income using end of 2015 store count is $433.344 million. There are 30.87 million shares outstanding, so that means $14.04 in eps.
What multiple do you put on those? MCD trades about a 18 ttm p/e, but CMG is growing same store sales three-five times faster and adding stores. PNRA trades at a 26 ttm p/e and 21 forward p/e, but one could argue CMG's growth prospects, especially internationally, are much stronger than Panera.
The stock is trading as if the international store count, currently at just 12, is going to expand fairly quickly. Compound that possibility with the fact chipotle is growing in catering and a growing consumer base, maybe Chipotle can grow earnings much faster than in the past. There is an argument for margins expanding as well.
That around $14 in eps based on the store count at end of 2015 seems fairly conservative, so if we even put a 25 multiple on that, we get a $350 PT. Right now, I would say the stock is trading on earnings in at least 2017, and as with any momentum stock, if the story changes CMG could be down a quick 15-20%. Even with the strong simplifying assumptions, I hope the thought process helped. For a better model, find an equity research report and figure out how they are projecting the income statement.
local mexican place (in the south) > Tijuanna > moes > chipotle. at least the chipotle locations around me just suck
Yes, burrito snobs will certainly be the downfall of Chipotle.
The problem, I think, is that you're looking at it on a P/E basis. That's just not right. You have to look at it on a P/Bto basis (Price-to-Burrito multiple). Given share price of 415.08 and a standard burrito order (braised pork, pinto beans, couple dollops of sour cream) at 8.27 USD pre-tax, you're left with CMG trading at 50.191x on a P/Bto basis. Now given all the efficiencies in salsa from organic farming and the economies of scale endemic to the guacamole space, I can easily see CMG trading more like 55.6-59.7x Price-to-Burrito.
They should use this as a case study to juice up the CFA textbook :)
Moe's tastes like they season their chicken with cigarette butts.
Made me LOL. +1
vegetarian...so doesn't apply to me.
You guys really don't know what a high P/E multiple means?
Love this commercial
I really hope that this high valuation leads investors to push management towards strong international expansion including setting up shops in Hong Kong. Central HK desperately needs this.
I just had chipotle for lunch today, but I wouldnt long or short this stock, since P/E is too high imo but at the same time the stock has been having great momentum these few years. Move on to a stock with a clearer picture.
BOOOYAAAAA, up 16% today. Yum Yum. love me some Chipotle...bought a big chunk @305 and riding...
seems that until few months ago it was at over 700 :) now back down but still over the initial price in OP.
Chipotle should go international but a 45 PE it is trading like a tech stock
What do you guys think of investing in chipotle right now? I think it's a safe bet with their E. coli outbreak over. They have a 32 P:E ratio and are up more than 16% since January 8th which was around when their problem ended.
Safe bet and a 32x P/E multiple are mutually exclusive.
Not to say Chipotle makes a poor investment if you're growth oriented investor, but to add it to your portfolio as a safer play is a poor reasoning for an investment thesis.
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