In the past, I have been bullish on Chipotle Mexican Grill (CMG, Financial) and the stock has provided robust returns of 34.4% in the past year. While the company’s Q4 2014 results have also been robust, there are concerns that CMG might not grow at a very strong pace in 2015. This article discusses the company’s fourth quarter and FY14 results, the outlook for FY15 and its implication on the stock price.
For Q4 2014, the company’s revenue increased by 26.7% to $1.07 billion with comparable restaurant sales increasing by 16.1%. The company’s diluted EPS growth was more robust at 51.8% with the company reporting a diluted EPS of $3.84 for Q4 2014. For 2014, the company’s revenue increased by 27.8% to $4.11 billion with comparable restaurant sales increasing by 16.8%. The company’s diluted EPS increased by 35% to $14.13 per share. Clearly, the quarterly as well as annual numbers are robust in terms of revenue and EPS growth. Besides these parameters, the company has done exceedingly well on the operating margin front and the comparable restaurant sales growth front. This has translated into strong stock upside in the last one year.
However, even after reporting a strong set of numbers for 2014, the stock is down by 7.6%. The reason for the decline is the company’s relatively bleak outlook for 2015 that brings the fear that very robust growth might not sustain for CMG.
Coming to the outlook for 2015, the management expects opening of 190-205 new restaurants during the year. This number is certainly robust and will contribute positively to the revenue and EPS. However, the number that is a matter of concern for the markets is the comparable restaurant sales increase potential in FY15. After an increase in comparable restaurant sales of 16.8% for FY14, CMG expects comparable restaurant sales increase of low to mid-single digit for FY15. I believe that has sent the stock down as it increases the fear that strong growth momentum for CMG will not sustain in the coming year.
If the valuations are considered, CMG is currently trading at a TTM PE of 52.2 and a FY15 PE of 32.15. Therefore, the valuations are rich and this needs to be backed by robust growth. With growth unlikely to be as strong as it was in FY14, the stock is correcting on the downside.
I must mention here that food costs were 34.6% of revenue in FY14 and this represents an increase of 120 basis points basis points due primarily to higher beef, avocado and dairy costs, partially offset by the menu price increase. This point shows that the complete increase in food cost can’t be passed on to the consumer. Depending on the food price trend, this can be a risk factor or a margin expansion factor. In my view, food cost is likely to go higher and this can serve as a margin restricting factor for CMG in FY15.
Even with these considerations, I still believe that CMG will continue to post robust EPS growth and the stock can be considered on any correction that is as deep as 10% to 15%. Therefore, I remain bullish on the stock with a relatively long-term view as the company’s menu continues to attract consumers. While growth expectations need to be toned down, even a 5% comparable store growth is decent from a long-term perspective.
In conclusion, investors can wait for some more correction before considering exposure to CMG. In my view, the stock is still a buy and hold.
