Chipotle: Food is Enticing, Share Price is Less So

I love eating at Chipotle -- if I’m in a rush, it’s an excellent choice as it tastes better and fresher, and seems much healthier, than eating at Mickey D’s. For those of you who haven’t had a chance to eat there yet, this Denver-based company makes healthy Mexican fast food.

Chipotle is still relatively new, and the company is still growing; they opened 29 stores in the first half of 2006 and planing to open a total of 80 for the year. Revenues have been climbing; they’re up 35% in the first half over the first half of 2005. Some of this is from the new stores but most of it is from a 16.9% jump in revenues at comparable stores. According to CMG, most of this growth in the comparable stores is from increased transactions, and the rest from some higher prices.

Despite the encouraging news of increased transactions and CMG’s plans to keep growing, there are also some reasons to be cautious. Chipotle’s profit margins are roughly half of the industry average; while these margins may improve as the company grows and starts seeing greater revenues from its investments in new stores, there is plenty of competition from other fast-food outlets offering relatively healthy fare, and it remains to be seen how much of the market Chipotle will be able to seize.

I also worry a bit about the separation from McDonald’s, as the larger company had provided pricing assistance and accounting services to its younger counterpart that are going to cost more now that they’re separate. If you look at recent insider buying and selling, the founder and CEO Steve Ells has sold 35,000 shares since August, all around $50 – which is right about where the stock is now.

And yet, the stock swap that was part of the separation has looked favorable for CMG, as McDonald’s is finding huge demand from shareholders who want to swap their McDonald’s stock for Chipotle stock. Part of it is the favorable ratio (.8879), but this could drive up the price of CMG in the coming weeks. Volume was already up on Friday, October 6, and things could get interesting soon.

Type of stock: A popular new fast-food chain with healthy delicious offerings and a steady rate of growth.

Price target: Some feel CMG is way overpriced, and its PE is extremely high. On the other hand, it’s popular and seems to be gaining ground, and the stock swap could drive up the price. It’s currently trading in the low $50s, down from the 52-week high of $67 that it reached in May. I don’t think it’s going to drop much lower than it is right now, but it may not jump quickly either as estimates for the rest of the year aren’t too positive. If you can stomach the risk, you could buy soon and hope this swap drives up the price. If you want to be a bit more conservative, I think you could buy this if it drops below $50, and be very happy.

CMG Since IPO

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