Investors seem to have an insatiable appetite for the shares of Chipotle Mexican Grill (NYSE:CMG). Over the last year, the stock price has surged to $275 from $123.
The company has been a growth machine — From 2005 to 2010, revenue has essentially tripled to $1.84 billion. On average, each Chipotle store will generate about $1.8 million on the top line. And the margins are juicy — consider that the return on investment for each restaurant is 61.8%.
Despite all the success, there are some skeptics, with10% of the company’s float is in short positions.
Might there be a fall? Let’s take a look at the pros and cons:
Pros
Food with integrity. Strong values drive Chipotle. Essentially, its mission is to rethink the concept of fast food. For example, Chipotle constantly looks for high-quality ingredients and cutting-edge cooking methods. The company also works hard on sustainability efforts.
At the same time, Chipotle has an efficient restaurant platform that can be scaled. It also helps that there is substantial investment in employee training.
Innovation. Chipotle plans to leverage its platform into other categories, such as with its ShopHouse Southeast Asian Kitchen. The concept is focused on Thai, Malaysian and Vietnamese food. The first restaurant will open in the summer in Washington D.C.
ShopHouse will take some time until it makes a meaningful contribution to Chipotle. But it should be a good long-term growth driver.
International. Most of Chipotle’s restaurants are located in the U.S. However, the company is starting to move into foreign markets. Consider that this year Chipotle will launch a restaurant in Paris. No doubt, there is huge untapped opportunity across the globe.
Cons
Cost pressures. There has been a sizeable increase in the prices of key food items for Chipotle like chicken, beef, tortillas and rice. The company has actually been avoiding price hikes. But the result is that margins have been hit.
Immigration issues. The U.S. Attorney has launched an investigation against Chipotle regarding the legal status of some of its employees. This is being done through the criminal division. It’s far from clear what will happen — but at a minimum, the investigation is going to be a distraction.
Premium valuation. Chipotle sports a market value of about $8.6 billion. In fact, the price-to-earnings ratio is a hefty 49 and the company’s shares sell at about 23 times pretax earnings. Other top restaurants chains, like
Panera Bread (Nasdaq:PNRA), Cheesecake Factory (Nasdaq: CAKE) and P.F. Chang’s (Nasdaq:PFCB), sell at lower multiples.
Verdict
There’s much to like about Chipotle and the company’s long-term prospects are bright. In the most recent quarter, it posted revenue of 24.3% and comparable-restaurant sales of 12.4%.
The problem is that investors have priced the stock for perfection. And with pressures from rising costs as well as the difficulties of producing standout growth rates, there’s a big risk that Chipotle will disappoint.
In light of such factors, the cons outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
