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Nicholas Kitonyi
Nicholas Kitonyi
Articles (307)  | Author's Website |

Chipotle: So Much Growth Ahead

Shares are up 50% year to date despite a recent pullback

May 28, 2019 | About:

Shares of fast-casual restaurant chain Chipotle Mexican Grill Inc. (NYSE:CMG) are up about 50% since the start of the year.

The stock topped $718 on May 20, but has since pulled back to trade at about $667 per share.

The performance follows last year’s impressive gain of 57%. Based on current analyst predictions, it looks like Chipotle still has some room to run in the coming years.

The current consensus analyst price estimate of about $820 to be realized within the next 12 months implies an upside potential of about 24%. This prediction is based on a number of factors, including revenue and earnings growth expectations as well as profit margin expansion.

Some of the expected growth was evident in the company’s most recent quarterly results.

In the first quarter, Chipotle's revenue was up 13.9%, driven by growth in digital revenue. Digital sales now account for about 16% of the company’s total revenue. Sales in new restaurants opened during the last 12 months also grew by 10%.

The company’s impressive performance last year was attributed to a significant change in strategy. This continues to win plaudits from top investors. Bill Ackman (Trades, Portfolio), the restaurant chain's second-largest shareholder with a 6.7% stake, said in his hedge fund’s recent shareholder letter that Chipotle is well positioned for long-term growth. He credited the impressive performance to CEO Brian Niccol and his team.

Niccol joined Chipotle early in 2018 from Yum Brands' (NYSE:YUM) Taco Bell. His approach appears to be having a positive impact on Chipotle’s performance. He has also overseen the company’s introduction of more menu options for vegetarians and vegans, which has, in turn, boosted sales.

The company is forecasting top-line growth of at least 10% in each of the next two years. With a significant improvement in margins, Chipotle’s bottom line is expected to perform even better, with earnings growing by 30% over the next five years.

This explains why most analysts foresee 24% growth in Chipotle shares over the next 12 months. The company’s performance this year is ranked among the top five in the S&P 500 Index members, which again highlights just how far it has come since the E. coli outbreak of 2015.

From a valuation perspective, shares of Chipotle are trading with a trailing 12-month price-earnings ratio of 92, which is expensive compared to its closest peers. Yum Brands' trailing 12-month price-earnings ratio of 23.74 and McDonald’s Corp.’s (NYSE:MCD) price-earnings ratio of 26.38 are currently more appealing to potential investors.

This is where Chipotle’s exciting growth story comes in, however. When the current price is synced with the company’s expected earnings growth for the next five years, its current valuation begins to make sense. Chipotle’s five-year expected price-earnings to growth ratio stands at 1.77, which is impressive compared to McDonald's PEG ratio of 3.69. However, Yum Brands still beats both with a PEG ratio of 1.69.

In summary, Chipotle’s introduction of a digital ordering system appears to be paying off. With digital sales now accounting for about 16% of overall revenue, there is still a long way to go.

Chipotle’s projected revenue and earnings suggest the company is on the right path to achieve its growth goals, which should keep shareholders happy despite the current valuation.

Disclosure: No position in the stocks mentioned.

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About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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