Chipotle Mexican Grill (NYSE:CMG) has risen substantially since its 2006 IPO — its stock is up about 528% from the $46 it traded at back in January 2006 to its current $289. But it missed estimates in its most recent quarter. Can Chipotle recover and run up more?

Here are three reasons that you might consider buying Chipotle:

• Good earnings reports. Chipotle has been able beat analysts’ expectations fairly consistently and has done so in four of its past five earnings reports. But in the quarter ending June 2011, Chipotle missed estimates of $1.68 by nine cents per share.
• Increasing sales and profits and cash-rich balance sheet. Chipotle has been increasing sales and profits. Its revenue has grown at a 22.3% annual rate, from $823 million (2006) to $1.84 billion (2010), while its net income has increased at a 44% annual rate, from $41 million (2006) to $179 million (2010) — yielding a 10% net profit margin. It has no long-term debt, and its cash rose at an annual rate of 9.9%, from $154 million (2006) to $225 million (2010).
• Out-earning its cost of capital. Chipotle is earning more than its cost of capital — and it’s progressing. How so? It’s producing EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, Chipotle’s EVA momentum was 3%, based on six months’ annualized 2010 revenue of $1.8 billion, and EVA that rose from six months’ annualized 2010 $91 million to six months’ annualized 2011 $109 million, using an 8% weighted average cost of capital.

One reason to hesitate:

• Chipotle’s high valuation. Chipotle’s price/earnings-to-growth ratio of 1.76 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It currently has a P/E of 47.81, and its earnings per share are expected to grow 27.09% to $8.68 in 2012.

This is an expensive stock, so I would consider buying it on a big dip. If it misses earnings expectations in the next quarter, that could create a buying opportunity or signal that investors should avoid this stock. It all depends on whether Chipotle can execute a turnaround plan.

Peter Cohan has no financial interest in the securities mentioned.