Monday, October 18, 2021

Chipotle Mexican Grill: Consistent Growth, but Likely Overvalued

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(C) Reuters. Chipotle Mexican Grill: Consistent Growth, but Likely Overvalued

Chipotle Mexican Grill (NYSE:CMG) operates and manages its namesake Chipotle Mexican Grill restaurants.

As of its latest filings, the company operates 2,808 Chipotle restaurants throughout the United States, as well as 41 international Chipotle restaurants. The company is also an investor in a consolidated entity that owns and manages four Pizzeria Locale restaurants, a fast-casual pizza concept.

Chipotle’s “real food with wholesome ingredients” concept has gained lots of traction, with the company growing its global footprint rapidly over the past few years.

Consequently, revenues and net income have also been snowballing. The company’s future is bright, with lots of international expansion prospects ahead. That said, shares trade with a steep premium attached. For this reason, I am currently neutral on the stock. (See CMG stock charts on TipRanks)

Robust Growth Prospects

Chipotle’s latest quarterly results once again showcased the company’s ability to retain exceptional growth metrics.

In Q2, revenues grew 38.7% to $1.9 billion. During the period, Chipotle opened 56 new restaurants against only five closures, continuing its expansion.

The most substantial growth driver, however, was its comparable-store sales, which skyrocketed by 31.2% year-over-year. Strong comparable-store sales greatly display consumers’ appeal for the brand and its food, and should serve as a reassuring enzyme for Chipotle to keep penetrating into new regions.

It’s worth noting that digital sales grew 10.5% year-over-year to $916.5 million, representing 48.5% of total sales. The rest were from order-ahead transactions, indicating that customers appreciate both the usefulness and convenience offered by Chipotle’s online channels, as well as the added value of Chipotlanes.

Regardless, the takeaway should be that as online sales grow, comparable sales growth should remain robust, as they open room for enhanced operational efficiency, and overall order management.

Chipotle’s profitability has also been expanding, as its business model is highly scalable. Gross margins have been stretched from around 30% to 40% over the past five years, while net margins have expanded from borderline positive to around 10% during the same period. As the company continues to open restaurants and scale its supply lines and operations, net margins should further grow.

Valuation

While Chipotle’s growth has been exciting, and will likely continue to be impressive, shares are rather pricey.

The stock is currently trading with a forward P/E of around 57.4. Chipotle has historically traded at a premium, which its earnings growth has been able to justify.

Still, even that premium has lately expanded, compressing investors’ margin of safety.

Ackman’s Equity Stake

Many of Chipotle’s investors may be unaware, but legendary investor Bill Ackman, who manages the holdings of Pershing Square (PSTH), holds around 3.86% of the company’s shares.

Ackman has been building this position since Q3 2016, showing great conviction to the company’s success story. The stock is one of Pershing Square’s only seven public-equity holdings.

While this does not change the fact that Chipotle is likely overvalued, having such an accredited investor on board and committed is certainly encouraging.

Wall Street’s Take

Turning to Wall Street, Chipotle Mexican Grill has a Moderate Buy consensus rating, based on 17 Buys, and seven Holds assigned in the past three months. At $1,902.19, the average CMG price target implies 1.1% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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