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Chipotle Mexican Grill, Inc. (NYSE:CMG) is a Mexican food restaurant chain with enviable growth. Unfortunately, it trades at very high valuation multiples. When compared to its peers, it is readily apparent that investors should stay away from Chipotle shares at current price levels. Chipotle's high price multiples should dissuade investors from buying at current prices until its valuations descend closer to those of its peers.

The Reckoning: Growth Vs. Value

As human beings, we love compelling growth stories. Unfortunately, these stories tend to increase the stock multiples beyond reasonable levels. Regardless of how shiny a stock is, investors should never buy a stock because the company is fancy, disruptive, or a fun to read about. Instead, investors should be focused on growing the value of their assets. Stories, drama, the next big thing, and other distracters cannot justify paying one dollar for fifty cents.

Instead, investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Chipotle shares are trading at the other extreme: Chipotle is a great company trading at overly enthusiastic valuations, which should be avoided. Its metrics are provided with other restaurant stocks:

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

CMG

Chipotle Mexican Grill

54.0

22.3%

5.2

22.5%

ARCO

Arcos Dorados Holdings

28.0

23.1%

0.8

17.8%

THI

Tim Hortons

22.0

13.3%

2.9

11.5%

YUM

Yum! Brands

20.6

13.6%

2.3

5.7%

EAT

Brinker International

18.2

14.3%

0.9

-6.1%

MCD

McDonald's

17.3

9.8%

3.4

5.3%

DRI

Darden Restaurants

14.0

12.0%

0.8

7.5%

Future valuation multiples of a company can be modeled over time by utilizing expected growth and trailing valuation multiples for Chipotle and peer stocks. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earning growth estimates and historical sales growth are as follows:

Click to enlarge

CMG PE Ratio vs. Peers

CMG PS vs. Peers

The projected crossover dates span well into the future, which demonstrates how Chipotle shares are overpriced. Even assuming that long-term analyst growth rates will continue indefinitely (which is itself ridiculous), it would take nine years of sustained, phenomenal earnings growth for Chipotle's current price-to-earnings ratio to be equivalent to that of McDonald's Corporation (NYSE:MCD).

These projections illustrate the absurdity of current valuations for Chipotle. Analyst estimates for faster-than-economic growth are not predictive more than three or so years, yet somehow investors are paying prices for Chipotle, which implies that they can see the distant future. Investors are more likely overenthusiastic than psychic.

Estimated convergence years were calculated below for Chipotle:

Chipotle Peer

P/E Equivalence

P/S Equivalence

Arcos Dorados Holdings

N/A

2058

Tim Hortons

2022

2017

Yum! Brands

2024

2016

Brinker International

2026

2017

McDonald's

2021

2013

Darden Restaurants

2026

2025

Investors should avoid Chipotle at current prices. Instead, they should consider other companies on this list as more reasonable alternatives, which can be justified without the absurdity of almost a decade of sustained, phenomenal growth. In particular, Darden Restaurents, Inc. (NYSE:DRI) is reasonably priced, especially when contrasted with its more expensive peers.

Please read the article disclaimer.

Source: Chipotle: Growth Vs. Value