Chipotle Mexican Grill, Inc (CMG) runs a chain of Mexican-themed casual restaurants predominantly in the United States, but also with a small number of locations in the UK and Canada. The company has an interesting history, counting McDonald’s Corp (MCD) as one of the early equity investors and expanding in from humble beginnings in the mid 90s to more than 1000 stores today. Though MCD exited its position when the company went public in 2006, CMG has enjoyed continued rapid growth since then, despite the recession (aggregate revenues experienced 17.4% CAGR since it became a public company).
Chipotle Mexican Grill Inc - Revenues and Margins, 2003 - 2Q 2011
Here we see the rapid rise in the the company’s aggregate revenues, along with tight cost controls which allowed the company to increase its operating and net margins throughout the period. Perhaps most impressive part of this graph is that the recession is not evident whatsoever. Though we’ll look at sales per store in a second, you can see from this that the expanding margins indicates that the company has not simply increased revenues by opening more locations that are less profitable. Rather, the company both opened new locations and increased profitability.
Chipotle Mexican Grill Inc - Sales per Store, 2003 - 2Q 2011
Here we see a (very) slight decline in sales per store from 2008 to 2009, during the heart of the recession. Otherwise, the company’s growth in revenues per store increased pretty much in line with aggregate revenues.
One thing I should note about that chart is that I have calculated the sales per average stores outstanding during the period, rather than simply using the company’s comparable store sales figures. Readers of Financial Shenanigans (Read my in-depth multi-part review here) will know that it is important to calculate these figures for yourself to identify potential inconsistencies that often show problems well before a company admits to their presence. The following chart tracks both my calculated figures and the figures provided by the company (the goal here is to identify any notable inconsistencies and trends).
Chipotle Mexican Grill Inc - Comparable Store Sales, 2004 - 2Q 2011
I don’t see any inconsistencies that would be a cause for concern, though from the quarterly data it is interesting to note how much smoother the company-provided data appear.
Let’s look to free cash flows.
Chipotle Mexican Grill Inc - Cash Flows, 2003 - 2Q 2011
Here we see that the company has grown cash flow from operations largely in line with revenues, and that free cash flows have grown quite dramatically over the last two years. These are all good things, indicating that the company is genuinely producing cash with its operations, rather than showing earnings due predominantly to accruals. The following chart confirms this.
Chipotle Mexican Grill Inc - Accruals, 2003 - 2Q 2011
As the above charts indicate, CMG is a great company that clearly has a capable management team. Unfortunately, this alone does not make a good investment. The greatest company can (and often is) a bad investment, due to the fact that widespread recognition of greatness generally leads to pricey valuations. This appears to be the case for CMG, which is trading at a whopping 52x trailing P/E (remember too these these are also the highest earnings in the company’s history), 10.5x P/B, and 56x P/FCF. CMG is overvalued by an exceptionally large amount.
Even my most enthusiastically bullish valuations resulted in the company being worth around half of its current price. You can imagine how shocking is the downside in my bearish scenarios (which could occur due to no fault of management, as in the cases of a double dip recession or the entry into the market of a well financed competitor).
Once again, I am not suggesting the company has any fundamental flaws. Perhaps management will be capable of growing the company fast enough such that the current price will be justified, but it is important to recognize that a purchase at these prices represents a staggering amount of speculation. Recognize also that even the slightly stumble tends to have a massively negative impact on the share price of companies that trade at such lofty valuations.
What do you think of CMG?
Author Disclosure: No position.
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