Screaming Short: Chipotle Mexican Grill

by Lawrence Meyers | October 27, 2011 9:26 am

Chipotle Mexican Grill (NYSE:CMG[1]) makes some mighty tasty dishes. It is also a great, simple restaurant concept. I believe the company will be around for a long time, and might even be purchased by a larger company someday.

As for right now, however, the stock is wildly overpriced and screaming “short-sell!”

All of the company’s valuations are out-of-whack by even the most generous metrics for a high-growth company. It is growing rapidly — estimates are for earnings to rise 21% this year, and another 26% next year, on revenue increases of 23% and 19%, respectively. Even the five-year growth rate is solid at 20%.

But the stock trades at a P/E of … get this … 49! I’m all for giving a strong, high-growth company with mountains of free cash flow a premium, but that’s just ridiculous.

And certainly, Chipotle’s $242 million of trailing-12-month free cash flow is impressive and bigger than previous years. But it is expensive on every other valuation metric. The price-to-book ratio is 10.47. Price-to-sales is 4.85. Enterprise value to EBITDA is 24.4. These are all the highest they have ever been.

Let’s put it in other terms. The value of each individual McDonald’s (NYSE:MCD[2]) restaurant in relation to the company’s market cap is about $2.87 million.

Family members who own stores tell me it takes about $1.4 million to build a restaurant from scratch, so a mature store would be worth double that. Chipotle stores cost roughly the same to build, but even if they cost twice as much, the present value of an individual Chipotle restaurant is $9.47 million. There’s no way that makes sense!

Next, the company itself disclosed that “inflationary pressures and freezes in Mexico and Florida” are impacting it.

As the company said, “Due to continued inflationary pressures, we expect food costs — primarily dairy and meats — to increase further in the second half of the year. However, we expect food costs as a percent of revenue to decrease in the second half of 2011 due to menu price increases.”

The company is in a tight spot with costs, and it expects consumers to absorb those cost increases. If the economy fails to recover, I would not be so optimistic.

I also don’t care for the same-store sales numbers. Yes, they were up 11.3%, but that was partially triggered by a 4.5% menu price increase. Management also guided same-store numbers into the low-single-digits for 2012.

Read that again — not high digits, but low. I think analyst estimates are actually a bit high as a result.

I’ve seen this story before. Look at the chart of Cheesecake Factory (NASDAQ:CAKE[3]) and the chart of P.F. Chang’s China Bistro (NASDAQ:PFCB[4]).  Big move up, then big move down, and then a recovery.





Now look at the chart for Chipotle (all courtesy of



Chipotle hasn’t had the big drop … yet. I believe it will, because it’s following the same story as these other two great “concept restaurants.”

That’s not to say Chipotle is going to fail. I doubt it will. I think it’s got a long life ahead of it. But before that, it has to fall off a cliff first.

You can buy put options or short the stock directly. Either way, the action to take is to short it right here, right now.

Lawrence Meyers does not own shares in any companies mentioned.

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