Burrito Wisdom: Chipotle, Up 40% YTD, Ain't Done
Shares of Chipotle Mexican Grill ( CMG) are on a run again, shaking off a bad 2012 to offer shareholders a nearly-40% gain so far this year. Its shares also are trading at higher forward valuations than any other billion-plus company in the restaurant sector, including those of the ever-popular Starbucks ( SBUX) and faster growing Buffalo Wild Wings ( BWLD).
That’s more like the old Chipotle Wall Street loved, whose share price doubled at the 2006 IPO and climbed steep and mostly steadily until mid-2012. Even with last year’s unpleasantness, Chipotle shareholders are still up about 830% since its first day of trading. Over five years, Chipotle has been a far better investment than Apple ( AAPL) and Google (GOOG), and it’s surpassed even Whole Foods Market (WFM) in its gains.
Perhaps it’s time to stop looking for bargains in Chipotle shares.
In March 2012, YCharts argued against buying Chipotle shares, largely because of its enormous share valuations and increasing costs. (Shares were trading at sixty times historic earnings, with expectations of about 27% earnings growth for the year.) That turned out to be the right call at the time. The shares plunged 40% from there to October and ended the year about 30% down from March.
The valuations are still in surprisingly high territory, even when compared to its most respected peers. But the ensuing share price recovery has taught us a few things about Chipotle.
For one thing, the company knows how to handle the outsized exposure it has to volatile food costs. That expense makes up an unusually high portion of Chipotle sales because of its focus on fresh and organic foods. Rising food costs created great hue and cry among Chipotle investors last year, many of whom pushed heavily for menu price increases to shore up earnings growth. The company has refused, which helped maintain traffic and sales growth through a weak period of consumer spending. Earnings growth is back, and the full-year same store sales growth forecast has been raised to “mid-single digit” from flat.
Note that investors are still comfortable buying Chipotle shares at much higher valuations than other respected competitors. Even during the worst of last-year’s sell-off, Chipotle’s share price valuations never sank to the levels of an ordinary restaurateur. Forward price-to-earnings growth ratios on Chipotle shares only briefly dropped to par with those of Starbucks, Buffalo Wild Wings and Panera Bread Co. (PNRA).
Long term, there is still plenty of room for Chipotle to expand. It has only 1,500 restaurants worldwide and is adding up to 180 this year. It’s developing a new chain of ShopHouse Southeast Asian kitchens, and early sales are good.
While it’s true that cheaper fast food takes away some business during periods of economic weakness, the idea that new menu items at YUM Brands’ (YUM) Taco Bell will devastate the organic, fresh food vendor seems far-fetched. (Despite the fact that it’s pushed by respected hedge fund guru David Einhorn.) A lot of Chipotle’s customers will never set foot in a Taco Bell.
Most analysts give Chipotle shares hold ratings with the warning that high valuations makes them vulnerable to even modestly bad news. And investment analysis reveals that the shares are far too expensive to pass muster as Warren Buffett-type value investment. But if your investment strategy, like Buffett’s, calls for buying good companies and holding them forever, Chipotle shares are worth considering. Just don’t expect them to go on sale any time soon.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.