With more than 2,400 locations and 64,500 employees, Chipotle Mexican Grill (CMG, Financial) isn’t going anywhere despite the continued bad press it’s been receiving of late. I recently stopped by one on Wisconsin Avenue here in Washington, D.C., at an off-peak time. The service was good. The food was still excellent. I had the three tacos. And, the price was comparable to many alternatives, including the McDonald's right down the street, for the same amount of food.
However, just last week in Ohio, there were reports of nausea, diarrhea and fever from 513 people. Thankfully, preliminary tests have come back negative and the restaurant has reopened. It’s one store, but it’s national news from a company that had won over the hearts of Americans with its $5 burritos. Today, at least in my town, those are $7 plus the 10% prepared food tax.
Chipotle's history of food-borne illness, as new as it may actually be, means that each new incident makes the news and is highly scrutinized. The fast casual chain was sued recently by an Ohio man for $25,000 after he purchased three chicken tacos on July 29 and then started experiencing nausea, headaches and hot flashes, according to the lawsuit filed in Delaware County Ohio. He was undergoing medical treatment, the lawsuit says.
These fears are absurdly overblown and haven't seemed to damage the stock, which is inching back up to multi-year highs. Guru Investor Bill Ackman (Trades, Portfolio) may get back on track at Pershing Square thanks to Chipotle. He continued to buy into the bad news and now has over 10% of the company’s shares, which compose north of 20% of his entire portfolio, at an average price under $340.
As for the company itself, it continues to open between 100 and 150 stores (net) per year, with each generating close to $2 million in sales. Both of those numbers will rise in the next decade. It wouldn’t be hard, especially with the former Taco Bell CEO in charge, to get to 5,000 stores in the next decade. Also, the average cost per meal will rise too, pushing sales higher. That could mean in 10 years that Chipotle is generating $2.5 million to $3 million per year per store.
Even with its current (lower than historical average) profit margins, Chipotle would be earning three times more. Investors should expect that the margins will settle back into the mid-$20s and that would put net income into the $1.5 billion range by 2028, if this pans out. And, since multiples only matter when you’re thinking about owning a company for capital payback purposes, Chipotle could trade at 30 to 40 times that number. So, even if this thesis is half right, the stock would be valued in the $23 billion to $30 billion range.
Disclosure: I am not long or short Chipotle.
