With investors very impressed with the growth prospects of Chipotle Mexican Grill (NYSE:CMG), this article is aimed at drawing attention to some of the multiples that indicate a short position for the stock. Since the beginning of the year up until present day the price of the stock has risen smoothly as shown in the chart below and reflects an increase of 96.99% since the beginning of the year.
Let us begin by exploring some of the growth prospects behind the increase in the stock price irrespective of unfavorable forecasts for the overall restaurant industry in the US. More than 90% of the company's restaurants are in the US.
Standing Firm Amidst Industry Trends
The US restaurant industry is predicted to take a hit from changing consumer preferences and sentiments. Customers are turning towards more health conscious options. Dining-out frequency plunged from an average of 5.8 meals out per month in Q1 2013 to 3.8 meals out per month in Q3 2013 with consumers' desire to eat healthier and higher quality food being identified as the primary reason for this decline.
In order to keep a firm foothold in the market, Chipotle has been showing flexibility by transforming itself to cater to evolving customer needs. The restaurant chain has been eliminating genetically modified ingredients from its food products. This has also resulted in hikes in its products' selling prices but this has not had much effect on the company's customers as 51% of people according to AlixPartners' survey rated healthy menu options as "important," "very important" or "extremely important" in picking where to dine out. In 2014, the company plans to inflate its menu prices by 3-5% and still expect to achieve a revenue growth of 24% in 2014 compared to 20% revenue growth in 2013.
Source: Ministry of Finance
As the US economy has been recovering as measured through forecasted GDP growth, shown in the chart above, consumers are likely to have improved incomes and spending which will allow them to afford these higher priced but healthier products. They would rather pay higher costs than diminish their health.
In addition to this, the company sells gluten-free food to cater to the health concerns of customers with gluten-related allergies. An increase in the demand for gluten-free food has also been observed in the US. The market for gluten-free products is forecasted to reach $15.6 billion by 2016 reflecting a growth of 48% from 2013-2016. The company also has the intention to bring in supplies of antibiotic and hormone-free meats which will further increase customer traffic for Chipotle restaurants.
Specialty and Uniqueness in menu
Source: Annual Reports
Another positive change made by Chipotle is that the company has simplified its menu by proposing limited food items that allow the company to concentrate on the quality of food items offered. This also brings a unique and special quality to the menu offered and the retention of classic dishes retains customer loyalty. This has also allowed the company to preserve its sales volume due to increased consumer traffic despite increased prices which also allows the company to maintain its margins as shown in the chart above.
Working as a Food Chain
Source: Morning Star
Chipotle operates using a chain business model instead of the franchised model that its most of its peers utilize. This enables the company to put more effort on maintaining the quality and taste of its food items and allows the restaurants to endure higher margins. The chart above shows the margins of a competitor, Noodles & Company (NASDAQ:NDLS), which operates using the franchise business model. The difference in margins earned by each denotes the fact that by operating a chain business model Chipotle is reaping more benefits.
Overall, the company has successfully been able to overcome the challenges presented by external environmental factors. These steps have indicated future growth prospects and increased the company's stock price. Now, let's have a look at what the multiples say about the stock price.
The company's stock is highly overvalued in terms of multiples when compared to industry averages. This means that investors are already aware of the company's growth prospects and this fact has already been included in the company's stock price.
While this article discusses the optimistic growth prospects of the company it is also important to know about the company's PEG ratio that measures the company's stock price in relation to the company's expected EPS growth. Currently the company's PEG ratio is at 1.9. A value below 1 is an indicator that investors have still not considered the growth prospects of the company but a figure greater than 1 denotes the fact that the stock being is overvalued and expensive in comparison to the projected earnings growth.
Another matrix used to determine whether or not a stock is overvalued is its EV/EBITDA as shown in the table below. Four of the competitors in the US restaurant industry have been selected for comparison against the company's EV/EBITDA. These include Panera Bread Company (NASDAQ:PNRA), Starbucks (NASDAQ:SBUX), McDonald's (NYSE:MCD) and Yum Brands (NYSE:YUM).
Source: Yahoo Finance
The company has successfully retained a strong foothold in the industry despite fluctuating trends by taking steps that are likely to preserve its growth in the future. Realizing this fact, the company's stock price has been rising and has now reached a level where multiples are indicating it is overvalued. Therefore, a drop in price is expected as the share price has already been affected by the growth prospects associated with the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.