By now, you all know the story of former high flyer Chipotle Mexican Grill (NYSE:CMG) so we won't rehash the details. With the stock down nearly 50% from its 2015 peak, the question today has become "at what price is the company investable again?" While the answer depends greatly on your view of unit economics going forward, it probably makes sense for fans of the company who also happen to be contrarian, value investors to closely monitor the situation now that the stock recently broke below the $400 level.
In this article, we will try to outline a few different future scenarios and what each could mean for the stock price. The results will vary greatly because we simply do not know how much of the lost business Chipotle can actually reclaim over time, but we will assume anywhere from the current status quo, to a return to the 2014 peak, to somewhere in between.
First, it is important to understand where the company was operating before the E. coli breakouts occurred in late 2015. According the company's 2014 10-K Annual Report, Chipotle was operating the most profitable, large restaurant chain in the United States, with average unit volumes of $2.5 million and store-level profit margins of 27%. Essentially, every unit was earning an operating profit of $666,000 before corporate expense, depreciation and amortization, and income taxes were accounted for. This was astonishing because it only costs less than $1 million to open a new Chipotle restaurant (see page 37 of the 10-K referenced above).
So let's first figure out what would happen if Chipotle gets back to those unit-level metrics. With roughly 200 new units planned for 2017, the company will end next year with about 2,450 locations. In this optimistic scenario, the company would book revenue of $6.125 billion and earn a 20% EBITDA margin, or $1.225 billion of cash flow. The stock right now implies an enterprise value of $11 billion, so that would be a 9 times EV/EBITDA multiple.
Most growth investors would say that is cheap, given that 8x is the industry norm and Chipotle should probably garner an above-average valuation. Importantly, even in this unlikely financial case, the stock even at current prices is not obviously undervalued.
So what would be more likely for 2017? Management is guiding to a 20% unit-level profit margin (who knows if they have a handle on this in reality or not). Unit volumes have tumbled to $1.9 million (from $2.5 million) and management expects a rebound next year. So let's assume $2.1 million of sales per unit, at a 20% four-wall margin, for the projected year-end 2017 unit count of 2,450.
EBITDA margins would be a more modest 13% (G&A costs of 7% of sales are the assumption in all of these scenarios), and total EBITDA would come to roughly $670 million. At the current stock price, CMG trades at 17x EV/EBITDA for this outcome. That is a higher valuation than one could find for nearly any chain that is not mostly franchisee-owned.
Finally, let's model a "middle of the road" scenario. Assume CMG can regain 70% of the sales and profits they have lost. Unit volumes would come in at $2.3 million and EBITDA margins would reach 18%. In that case, 2,450 units would generate EBITDA of just over $1 billion, making the current valuation 11x EV/EBITDA.
As you can see, under none of these scenarios does CMG look like a screaming buy (as long as you are comparing to other publicly-traded restaurant chains). At the same time, it is not trading in nosebleed territory like it did a couple of years ago.
If the stock price continues to fall, the price could get pretty interesting. At $300 per share, for instance, the enterprise value would be down to roughly $8.35 billion. At that price, bulls on CMG's long-term business prospects would probably get very interested in the stock. Until then, it seems it is finally worth keeping an eye on.
What do you think? What multiple would you assign to the company? What store-level metrics do you think they can regain in 2017 and 2018? We always are interested to hear what readers think!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.