Has Chipotle Peaked?

| About: Chipotle Mexican (CMG)

Chipotle (NYSE:CMG), the Mexican fast food joint, is a valuable stock for investors, having generated over 200% returns since its public launch in 2006. The current market price of the stock is $145, up more than 3X since the initial public offering. Chipotle’s dramatic runup can be attributed to the company’s impressive growth and increasing profitability.

Based on our analysis of Chipotle’s future growth prospects, we believe that the market is currently overpricing the stock by about 4%. Below we explain in detail how factors such as average spend per customer, new stores openings and rising customer traffic are implied in the Trefis price estimate of $139 for Chipotle’s stock.

Average Spend per Customer Visit to Reach Around $14

Chipotle’s menu consists mainly of burritos, tacos and salads. Prices are higher than fast-food peers such Burger King and McDonald’s (NYSE:MCD), resulting in higher average spend per customer.

The average amount spent by a customer at a Chipotle restaurant rose steadily from $8 in 2005 to $10.5 in 2009, driven by rising menu prices that were in turn the result of increasing ingredient costs.

We expect the average spend per customer to reach $14 by the end of our forecast period, again driven by rising ingredient costs that Chipotle will pass on to restaurant patrons.

Around 100 New Chipotle Restaurants Every Year

On average, Chipotle has opened 100-120 new restaurants in each of the past few years, taking its year-end restaurant count from 489 in 2005 to 956 in 2009. Despite the higher prices, customers have responded well to Chipotle’s menu, which offers a refreshing alternative to the burgers and pizzas that tend to dominate American fast food menus.

We believe Chipotle has significant scope to increase its restaurant count, which is very low compared to around 14,000 U.S. restaurants for McDonald’s (this figure includes company-owned and franchised restaurants).

Chipotle recently entered the European market by opening its first restaurant in London. The company is reportedly seeking additional sites in Britain, France and Germany. We estimate that Chipotle will continue adding, on an average, 100 new restaurants every year, taking its count past 1,600 restaurants by the end of the Trefis forecast period.

Customer Traffic Recovers

Customer traffic at Chipotle restaurants reached 170,000 visits per restaurant per year in 2007. Growth has been driven primarily by increasing brand awareness, customer loyalty and Chipotle’s focus on reducing service time.

During the economic downturn of 2008 and 2009, Chipotle saw customer traffic decline due to lower U.S. consumer spending. Customers also reacted poorly to rising menu prices during hard economic times.

That said, Chipotle’s strong focus on customer service coupled with improving economic conditions should bring patrons back to the restaurants. We expect the number of visits per restaurant per year to reach 180,000 levels by the end of the Trefis forecast period.

Disclosure: None