Chipotle Mexican Grill (CMG) is a top tier quick service restaurant serving great food with integrity. They offer a great bang for your buck in the fast casual sector. The food sector catering to the health conscious seems to have an unstoppable wave behind it. Other companies in the sector such as Panera Bread (PNRA) and Whole Foods Market (WFM) are enjoying great success because of the shift towards organic locally grown food.
Great Management Performance
Management has been able to quickly expand across the United States. Chipotle has plenty of growth left in the market with restaurants numbering (1,350), compared to Taco Bell's (YUM) (5,800) or McDonald's (MCD) (18,590). Management expects to hit or exceed the high end of the restaurant opening guidance. They expect to open 165 to 180 new restaurants in 2013. They are showing a conservative approach to new restaurant openings with about 70% in proven and established markets, and 30% in new and developing markets.
While in the foreseeable future almost all growth will come from US based standard Chipotle restaurants, sources of future growth are being developed. The main sources of future growth are the ShopHouse brand and expansion into international markets. New restaurant openings include 1 ShopHouse in D.C with two more planned for L.A, 5 standard restaurants in London, 4 in Toronto, and 1 in Paris.
Management has been selective about marketing costs keeping full year 2012 costs to 1.4% of revenue. They have great initiatives which promote strong brand awareness. The Food Retail Halloween promotion, in which hundreds of thousands of people come to Chipotle dressed in family farm-themed costumes helped raise $1 million for the Chipotle Cultivate Foundation. These types of customer oriented initiatives, alongside the food with integrity program have branded Chipotle as one of the most health conscious options in the sector.
Balance Sheet and Cash Flow
Chipotle Mexican Grill has a pristine balance sheet with $574 million in cash and short-term investments, and zero long-term debt. Chipotle generates enough cash to finance all of its expansion and has leftovers for stock repurchases. Over the past 4 years, Chipotle repurchased a total of $388 million of common stock at an average share price of $117. After the recent crash in the stock the Board of Directors approved an additional $100 million of buybacks. Even with expansion costs and buybacks Chipotle's cash holdings have doubled since 2010.
The bear case for Chipotle has been discussed by Value and Arb with the gist being food cost inflation and competition from Taco Bell's cantina menu. At Chipotle's current prices these concerns are well baked into the valuation.
Shares of Chipotle plummeted after same store sales growth was not as high as expected. At the time Chipotle had a sky high valuation, a $14 billion market cap with a P/E of 60. Now it has a much more realistic P/E of 31 and a market cap of $8.7B. If we assume over the next five years Chipotle can double its store restaurant count to 2700 we derive an EPS of 17.4. Assuming a large and unlikely ten percent drop in profitability due to margin compressions EPS would be 15.7. Suppose a conservative P/E of 25, logical since Chipotle would still have plenty of room to for growth, we receive a valuation of around 400 or 10% per year assuming a buying price of 276. The five year valuation could be much higher if Chipotle begins pushing the ShopHouse brand, ramps up new store openings to 250 new locations per year, or margins expand instead of contract.
Short term, it might be possible to pick up shares at a better price point. This is due to negative sentiments surrounding the stock and macro economic headwinds. In any case, at current prices the stock is a great buy. I personally snatched up some shares at 230 and 250.