Recently there has been a lot of debating around whether Chipotle (NYSE:CMG) is overvalued or not. There is only one way to settle the dispute, and it is to compare Chipotle with some other companies in the same industry. For comparison purposes, I will use McDonald's (NYSE:MCD), Jack in the Box (NASDAQ:JACK) and Yum Brands (NYSE:YUM). Let's find out.
1. P/E Ratios: In this metric, Jack in the Box has the lowest ratio with 13.34. McDonald's comes second with 19.96. Yum comes third with 24.51 and Chipotle comes last with 55.51. Chipotle's real high P/E ratio reflects very high expectations investors have regarding the company.
2. Forward P/E Ratios: In this metric, once again Jack in the Box comes first with 13.59. McDonald's comes second with 17.76, Yum comes third with 19.34 and Chipotle comes last with 41.15. Again, Chipotle's P/E value is much larger than its peers.
3. Price to Book Ratios: Jack in the Box comes first with 2.36, McDonald's comes second with 7.77, CMG comes third with 11.22 and Yum comes last with 14.45. Chipotle's price to book ratio is not as high as Yum Brands, however, it is still too high compared to McDonald's and Jack in the Box.
4. Price to Cash Ratios: Yum comes first with 23.05. Chipotle comes second with 25.05. McDonald's comes third with 42.98 and Jack in the Box comes last with 82.61. In this metric, CMG performs a little better than YUM, but falls significantly behind the other 2 peers.
5. Price to Revenue Ratios: Jack in the Box comes first with 0.43, Yum comes second with 2.38, McDonald's comes third with 3.93 and Chipotle comes last with 5.2. This is another metric where CMG falls far behind its competitors.
6. Price to Operating Cash Flow Ratios: Jack in the Box comes first with 7.48, Yum comes second with 13.26, McDonald's comes third with 14.53, and Chipotle comes last with 29.03. In this metric, JACK, MCD and YUM are very close to each other but CMG falls behind by far.
In conclusion, compared with competitors in the same industry, CMG seems a little bit overvalued. Of course many people will say that CMG has great growth potential in the next 5-10 years, however most if not all of that tremendous growth is already expected and part of it may be already "baked-in" the price by now. The company will have to beat overblown and unrealistically high expectations in the future to keep the moment going.
My recommendation with CMG would be two-fold. For those who already own the stock, my recommendation is to sell it and take profits so that you can initiate another long position after the stock corrects. As for those that do not own the stock, I would suggest waiting until the stock price falls to more attractive levels. As for shorting the stock, I do not recommend it because the stock has such momentum that it always seems to find a way to bounce back up after any corrections.
The chart below shows the sharp corrections CMG has endured in the last 52 weeks. As you can see, every correction created an opportunity for longs to initiate or increase their position in the stock.
(Click to enlarge)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.