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Chipotle Mexican Grill (NYSE:CMG) is one of the most popular and best run quick service restaurant chains in the world. Although it has made a heavy footprint in many U.S. cities, there is still plenty of room for expansion as analysts expect per annum earnings growth of over 20 percent for the next five years. A few months ago, Chipotle shares were obviously overpriced and a July earnings miss has brought shares back to Earth, with the company now trading around 30 times earnings. In this article, I weigh the pros and cons of what is expected from Chipotle in the coming year.

The Good:

In its most recent earnings report on October 18th, Chipotle posted some very strong, yet realistic, expectations for its future. It expects to open between 155 and 165 new restaurants for all of 2012. At its current number, Chipotle needs to open 37 new restaurants in the fourth quarter to reach the 160 mark and with 36 new restaurants opened in quarter three, this number is very attainable.

One of my biggest criticisms of Chipotle before its big drop was that its same store sales expectations in the high single digits was a big jump since many of its stores suffered from overcrowding during the lunch rush and high growth was not physically attainable. In 2013, Chipotle has lowered their same store sales expectations to a range from flat to low single digits. This is a much more realistic expectation than before and should help prevent another bad earnings disappointment.

Chipotle is beginning to expand internationally and has a lot more room for development. Two of its new restaurants opened in the third quarter were in London, England and Chipotle has some restaurants in Toronto and France. This small international footprint can lay the groundwork for even more international stores in Europe and Canada and can prepare them to enter a growing China market that has become the top strategic priority for competitors like McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM).

The Bad:

Despite lowering its same store sales expectations, I believe that some of Chipotle's short term goals are still a little bit lofty. The company expects to open between 165 and 180 stores in 2013, despite the fact that it currently is on pace to open 160 in 2012. Its 2013 expectation would grow the number of Chipotle stores by 12.4 percent. 155 new stores would grow stores by 11.2 percent and 160 new stores, its 2012 target would grow stores by 11.5 percent. Even though a failure to increase its number of stores will only result in about a 1 percent miss, this could easily hurt share prices by 3 to 5 percent and cause investors to lose trust in Chipotle's outlooks after the company badly missed this year.

Analysts expect Chipotle's revenue to increase by 14.3 percent from 2012 to 2013. With its same store sales expected to be around 2.5 percent, analysts basically expect Chipotle's new stores to perform at about 95 percent of the capacity of their existing stores, if you assume a 12.4 percent increase in their number of stores. I believe this is a lofty expectation since many of their new stores will be opened in smaller markets that have a much lower profit potential than many of its existing stores. This could result in a revenue and earnings miss that could send shares down between 5 and 10 percent.

Recommendation:

One thing I can say about Chipotle is that it's a great company and has a sustainable business model that will bring it long term profitability. My previous recommendation for Chipotle before its July earnings miss was Hold to Sell. I believe that at $263.25, it is now a Hold and maybe even a Slight Buy. I believe many of its new outlooks are very attainable, but some analysts and investors may still have lofty expectations that may not get met. At $250, Chipotle becomes slightly more attractive, and I think it should be looked at as an easy pickup at or below its 52 week low of $233.82. My biggest takeaway from researching CMG is that although the 20+ percent declines are almost definitely a thing of the past and Chipotle is now trading at a very fair price, there may be a couple minor setbacks in the next year that could hinder shareholders.

Source: The Good And Bad Of Investing In Chipotle