The good news has arrived and Chipotle (CMG, Financial) is now trading under $400 per share. While I think it is 100% a buy at these levels, the future of the market worries me. There are really not many true bargains to be found, which is why I haven't been writing as much. That said, here's my take on Chipotle at the current price.
The company has a market value of $11 billion.
It has more than 2,000 restaurants.
It has a 5-star GuruFocus rating.
By comparison, Shake Shack (SHAK, Financial) with 85 stores is valued at $1.3 billion, while Chipotle has 23 times more stores that actually generate the same amount of total revenue per location.
Simple Math
Sales: 4.05 billion
Stores: ~ 2,010
Sales Per: $2.01 million
In the last decade, there have been very few high fliers in the growth department that could keep up with Chipotle. In 2006, the company booked $41 million in profit on $823 million in sales. Over the last 12 months, it earned $212 million on just over $4 billion in revenue. CMG took these earnings and built its book value from $13 to $51 and its stock price from $48 to $396.
Here’s the thing: In my opinion, the last twelve months are simply an abnormality and the growth of the company is still on track. More importantly, investors getting in now, while Chipotle is experiencing a minor hiccup could be handsomely rewarded into the near future.
First off, the 18% gross margin CMG currently reports is far less its 26% average and by the end of 2017, I see that getting back into the 23/25 range. That will put the gross profit back over a billion, the operating income before taxes in the $600 million range and the EPS around $10.
From this point, the real work begins because Chipotle has to grow its sales by opening new restaurants, which by the end of the decade could reach 3,000 total stores. That coupled with slow rises to the cost of burritos, bowls, etc. may mean that CMG can squeeze out $2.5 - $2.75 million per location by then.
That will put the sales figures between $7.5 billion and $8.25 billion, producing around $800 million to $900 million in net income.
And, if interest rates remain low (the chances are good) then the price to earnings multiple will remain high as well, the stock could easily trade at 35x, putting the value of the company in the $28 billion range or 2.5x its current market cap.
Oh, and this does not even take into account the new startup concepts the company is rolling out. ShopHouse, Pizzeria Locale and a new Burger brand could also add to the growing legacy of Chipotle. Truth be told, CMG is putting YUM brands (YUM, Financial) on watch, and I would much rather have a chicken rice bowl than a Taco Bell meal deal any day of the week.
If you are confident that the market will not suffer a bear drop in the next 1 - 3 years, owning a piece of this stock would not be a bad idea. Long term, I think the value will be much higher, but you could get in at a much lower price point as well.
Disclosure: I have no positions in any of the stock mentioned in this article.
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