Chipotle Mexican Grill: 4Q Expectations

Normally I don't research a company's coming quarter this soon after they report results, but in this case with Chipotle Mexican Grill (CMG), I think it's worth doing. I say this because worries about the valuation and whether or not they can continue to beat estimates at this rate have been rising lately. These are legitimate concerns, but I personally believe there is still plenty of juice left in Chipotle and that they'll be able to beat estimates in the coming quarters (unless analysts start to smarten up and understand the business - which I don't see happening anytime real soon). So, let's take a look into the coming 4Q 2007.

For the coming 4Q 2007, analysts are on average expecting an EPS of $0.49 with sales of $286.42 million. Basically, analysts are expecting the EPS to grow 49.5%. This on its own is a pretty good slow-down from the past couple quarters of 70%+ earnings growth. The high EPS estimate is $0.58 with the low at $0.45. Here's how Chipotle's past four quarters have stacked up against analyst EPS estimates.

This isn't new news, but I think it's important and quite fun to keep track of Chipotle's incredible and growing track record against analysts.

Okay. Analysts are expecting sales to grow at a rate of 30.9% from the 4Q 2006's sales of $219.72. Let's do a brief recap of revenue growth in the past three quarters.

Given that the 2Q and 3Q are historically the best quarters for Chipotle, I'm not quite expecting sales to grow at the rate they did during the summer. However, I do think we'll see a higher rate than 30.9%. For a reasonable estimate, I am going to use a sales growth rate of 32%.

$219,720,000 * 1.32 = $290,030,400 total sales in 4Q 2007

I certainly believe we could see a higher growth rate than this. But I want to keep my estimates reasonable and conservative for this valuation. Now we get to estimating earnings and the EPS. The profit margin is the key factor here; the hard part is figuring out what a reasonable one to expect in the 4Q is. Let's again look at the past four quarters to get an idea of how the profit margin has progressed.

Clearly the profit margin has greatly improved over the course of approximately one year. This is because of management's stellar cost management while sales and earnings have rapidly expanded, as well as new moves to speed up the ordering process in the company's restaurants, among other things. It's not a real common thing to see such efficiency in companies growing at a rate like Chipotle, but there are a few out there. I think expecting a profit margin of 7% is reasonable. This is because since last year things have become much more efficient within the restaurants themselves, costs have been very well managed, and the company's overall efficiency has made tremendous progress. So, let's use a profit margin of 7% on our sales estimate of $290,030,400.

$290,030,400 * 7% = $20,302,128

Now we need to find the EPS. In its 3Q 2007 press release, Chipotle gave 33.25 million as its estimated diluted share count for 2007. This is reasonable and what we'll use to estimate the final EPS.

$20,302,128 * 33,250,000 = $0.61

$0.61 per share in earnings. This beats analyst estimates by approximately 24.5%. And I honestly believe Chipotle could do better than this; I wouldn't be surprised if they did. I think these are very reasonable estimates and I will be expecting an EPS somewhere between $0.61 and $0.63. If the EPS were to come in at $0.61 in the 4Q, it would put the TTM EPS at $2.21.

So, to recap, here's what I am expecting:

32% sales growth to $290,030,400.

Profit margin of 7%.

Diluted share count of 33,250,000.

Final EPS of $0.61 for the 4Q 2007.

Disclosure: Author has a long position in CMG

Comments

[SixPackPablo]

any advantage to buying the B shares in CMG...they appear to be selling at 20% discount as of 1/4/08? why the discount?

[SixPackPablo]

Any advantage to buying the B shares in CMG? They appear to be selling at 20% discount to CMG Common. To rephrase this, why the discount to begin with?

[DavidKretzmann]

I own the B shares because they have ten times the voting power of the A shares, and there's absolutely no reason for the discount. Eventually the B shares will correct to a more appropriate value, whether it's through a share buyback or if Chipotle merges the two shares. It may take a year or two, but eventually I believe owning the B shares will pay off.

[borisb]

well written!