Chipotle Mexican Grill 1Q Earnings Preview: Analysts Overly Pessimistic

Chipotle Mexican Grill (CMG) is planning to announce 1Q 2007 earnings on May 1 after the market close.

Weather is the main thing on analysts' minds; they're worried that food outlets will have lots of pressure due to cold weather this quarter. Some outlets have had poorer-than-expected results which they blame on unusual weather (including Panera (PNRA)), and while Chipotle will certainly face some pressure, I don't think they will feel it quite as much. This is because Chipotle's product is slightly less dependent on the weather (it's not quite as much of a specialty product place, as restaurants such as Panera or P.F. Chang's (PFCB) are); I think the Chipotle crowd goes to Chipotle whether it's cold or hot outside. People still get a quick, quality meal, and that's what counts. But, one can't ignore the weather, and management has mentioned that they certainly have felt some pressure from the unusual weather.

Analysts are expecting an EPS of $0.32 on sales of $227.75 million. Something to note is that over the past couple of months analysts have lowered their estimates and as of now most are not very bullish on the stock. In the 1Q 2006 Chipotle reported an EPS of $0.26 which smashed estimates of $0.12. I'm definitely not expecting them to beat estimates by such a wide margin again this year, but I think they can and will beat estimates this quarter.

I think the estimate of $227.75 million in sales is a good one. The trouble is determining what a good profit margin to expect is. Last quarter it was 4.93%, in 2006 it was 5.03%. I think Chipotle will be facing higher pressure than usual from the weather, but I don't expect anything major. I'm going to use a profit margin of roughly 4.76% for this estimate. Chipotle has extremely smart management and a strong cash position, so if anything major did go against them, I'm confident they did something or are in the process of doing something about it.

A profit margin of 4.76% on sales of $227.75 million would mean net income of approximately $10,845,238. I'm going to assume the diluted share count goes up a bit to 33,000,000. This equals an EPS of $0.328. That beats estimates by a slight amount, but beating estimates is beating estimates. I think Chipotle will do better than this, but this example shows just how much of a drop-off analysts are expecting. I think analysts aren't taking note of the fact that Chipotle is not nearly as much of a specialty retailer like P.F. Chang's (Chinese food) and Panera, among other outlets that have been hurt by the weather. I think Chipotle has a wider, more diverse following than those places and other restaurants that have felt the pinch. So, I think Chipotle could easily announce an EPS of $0.34.

If Chipotle did get hit this quarter and reports what analysts are expecting, it will still be very nice growth YOY. I'm sure management knows what they need to do, so if this is a "slow" quarter, they will go over what went wrong and what they can do to improve things. But overall, I feel analysts are being too pessimistic and treating Chipotle like a specialty retailer, when in reality they aren't. They've got a very wide range of customers, so I doubt business has taken as much of a hit as people think.

I remain very excited about Chipotle, and am looking forward to the earnings release and what management has to say. After doing a little bit of analysis, I think we'll see yet another estimate-beating quarter.

Disclosure: Author has a long position in CMG

CMG 1-yr chart

Comments

[borisb]

good work. would like to ask a few questions.
curious what you thoughts were on the franchise/brand strength of CMG
on a 1 to 10 scale, with a Starbucks and Whole Foods being near 10,
for the sake of a marker. Also,
if CMG.B pe ratio is slightly over 30x for 2007 earnings what expansion is left in the valuation by this measure for this year? Even though posted annual square footage growth is around 22%-25%, are the margins/economies of scale causing a better earnings growth rate going forward? The 2007 price to sales ratio is about 2x, while in nearby years PNRA has traded up to 3x-4x sales. Do CMG growth factors exceed generic-ish PNRA growth factors and warrent an expansion by this measure? Is CMG a mini-mcdonalds and is there some concrete foreign expansion when the US fills up with all these 4000-6000 CMG. BAJA. QUOBA. RUBIOS. sites?
(McDOnalds has or almost has more absolute sales in Europe then in America now. ) TIA. Bern