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I have received a few questions recently about whether Chipotle Mexican Grill (NYSE:CMG) is overvalued or not, as its 51.2% stock price increase over the past year has bumped its price/earnings ratio to over 62. Regardless of whether or not the stock is overvalued, Chipotle is a great company and will most certainly grow and stay profitable if it continues with its current business plan. The question is: Will Chipotle grow enough to justify its $419 stock price?

Analysts expect the company to report earnings per share of $8.86 in 2012 and $11.06 in 2013. They also expect Chipotle to experience per annum earnings growth of 21.81% over the next five years. Using these assumptions and a discounted earnings approach, Chipotle would need only 4% annual EPS growth after five years to meet its current price. At 3% annual EPS growth, Chipotle is a $359 stock. At 5% growth, it is a $527 stock. By these metrics, it appears that Chipotle is a Buy or a firm Hold.

What really matters is if Chipotle can meet its lofty earnings expectations over the next five years. Its growth will come from a combination of same-store sales and new store openings. In its earnings summary on April 19th, management expected same-store sales to increase by mid-single digits (compared to 12.7% currently), the same as food price inflation. Going into 2012, Chipotle had 1,230 restaurants and plans to open 155 to 165 more this year, including the 32 it opened in the first quarter. In 2011, Chipotle opened 150 restaurants, which means that the company's restaurant count increased by 13.9% in 2011 and will drop to an increase of 12.5% in 2012.

Judging by these numbers, it does not appear that Chipotle will be able to grow at 20% going forward. Assuming same-store earnings growth of 5% and that its new restaurants will earn the same as current restaurants, Chipotle will have earnings growth of 17.5% in the next year. Analysts currently predict Chipotle earnings will grow by 30.1% in 2012 and 24.8% in 2013.

When pegging a 17.5% five-year per annum growth estimate onto the company, as opposed to the aforementioned 21.81%, Chipotle will need 4.72% long-term earnings growth to justify its current value. Yum Brands (NYSE:YUM) would need only 0.4% long-term earnings growth to justify its value using the same valuation model. McDonald's (NYSE:MCD) shares could have stagnant long-term earnings growth and justify its valuation with the same model.

Right now, I put a Hold to Sell recommendation on Chipotle and value shares around $390. By no means is it a bubble stock ready to burst, but there are much better buys out there in a very similar industry. Chipotle should continue to grow and become a stronger brand over the next few years, but the price on that growth has flown too high.

Source: Chipotle: Priced For Growth Or Overvalued?