Shares of Chipotle Mexican Grill (CMG) have plummeted 28.4% since my last bearish call on June 25, 2012. Although the plunge has sent the share very close to its 52-week low of $271.53, I continue to be bearish on the stock as the current valuations remain unsustainable relative to the firm's fundamentals. In this article, I will illustrate the rationales backing my bearish view.
The following discussed value analysis includes a set of publicly traded restaurant chains in the U.S. market as CMG's comparable peers. The estimated stock value is then determined by equally weighting the valuations calculated by five peer average multiples—EV/Sales, EV/EBITDA, EV/FCF, P/S, and P/E.
The following three paragraphs are based on the table shown below:
Click to enlarge
In terms of growth prospects, CMG indeed beats the entire group as its revenue, EBITDA, and EPS are expected to rise by a strong two-year CAGR of 18.6%, 24.2%, and 27.2%, respectively, over the current and next fiscal years. Those are substantially higher than the group averages.
CMG's profitability is also incredibly superior relative to its peers. Except for ROE, all of the margin and capital return measures are higher than averages, while ROE is just slightly below peer average.
The company has been able to maintain a robust FCF margin and carry very little debt. That has helped lifting its current and quick ratios, which are much better than the peers'.
As such, CMG should warrant a premium valuation. However, the current stock price of $297.65 actually implies a whopping 83.4% premium over the five peer average valuation multiples—an exaggerated level for me even given the firm's financial excellence and strong growth potential (see below).
Applying a more reasonable but still lofty 50% valuation premium, the estimated stock value would be 18% below at $245.32 (see below).
Let's now look at another indication of CMG's overvaluation. Panera Bread (PNRA) is the only company in the peer group whose financial performance and growth potential are most comparable to those of CMG (see below).
CMG's profitability, growth prospects, and liquidity position are only marginally better than those of PNRA. Nevertheless, CMG's current price of $297.65 still represents an average 43.1% premium over PNRA's five valuation multiples (see below), further suggesting CMG's valuations are still somewhat too optimistic.
Bottom line, CMG's remained-lofty valuations provide little margin of safety to investors. I can't deny that the company's operations and growth are absolutely excellent, but for the sake of an unfavorable risk/reward profile, I strongly recommend investors avoiding or even shorting the shares.
All tables are created by author and all financial data is sourced from Capital IQ and Morningstar.
Disclosure: I am short CMG.