Chipotle’s Growth Falters: CMG Stock Could Face Near-Term Pain

Slowing same-store growth is likely drag on CMG in the short term

The investing world has become accustomed to Chipotle Mexican Grill, Inc. (NYSE:CMG) effortlessly delivering gangbuster results one quarter after the other.

Chipotle Mexican Grill (NYSE: CMG)Consequently, the fast-casual-themed burrito maker is held at a higher standard compared to its peers — a fact that clearly reflects on the lofty valuation of CMG stock.

Chipotle earnings for the first quarter of fiscal 2015 were actually pretty decent, but still fell short of the high expectations for the company. CMG reported revenue of $1.09 billion, representing growth of 20% compared to the company’s revenue of $904 million in the previous year’s comparable quarter. Analysts, however, were looking for revenue of $1.11 billion.

Chipotle nevertheless managed to beat on bottom-line expectations, managing to post earnings of $3.88 per share — a hefty 47% year-over-year growth and well above analysts’ expectations of $3.66 per share.

The bone of contention for most analysts was that Chipotle same-store growth clocked in at ‘‘just’’10.4%, considerably lower than the 11.8% growth that consensus analysts’ expectations pointed to. Consequently, CMG stock tanked about 5% following the release of the earnings report.

Same-store sales contracted three percentage points compared to first quarter fiscal 2014. Of course, CMG enjoyed a splendid year in 2014, managing to post a rip-roaring 16.8% same-store growth for the full year, setting up tough comparisons for 2015.

Unimpressive Guidance

CMG’s management blamed pork supply chain issues for its popular carnitas product for the slowed growth. But, more telling was the fact that the company guided for low-to-mid-single digits same-store growth for the full year, which in effect means that same-store growth for the full year is likely to be cut in half compared to the previous year’s reading.

That could be a strong indication that the days of effortless, double-digit same-store sales growth might be behind CMG.

Will Slower Growth Provide a Headwind for CMG Stock?

The biggest danger for Chipotle stock and its investors right now could be that the company’s slowing growth might start acting as a drag on CMG stock. One of the biggest challenges of investing in growth stocks like CMG stock, especially for short-term investors, is to correctly identify when the big growth phase is gone, which is usually a signal that it’s time to take profits and run.

CMG stock trades at a considerable premium to its peers, primarily because the company has long been the industry’s poster child for fast growth. CMG’s forward PE ratio of 33.5 actually ranks the highest in the industry, while the company’s Price-to-Free-Cash Flow reading of 50.8 is higher than 68% of companies in the same industry.

CMG however, still has a couple of important growth drivers that can support share gains for CMG stock in the future. The company’s cash grew 30% year-over-year to $543 million, considerably faster than the company’s four-year growth rate of 22%.

Strong free cash flow growth can help to make the valuation of a company’s share more favorable in the eyes of investors, especially when its top or bottom lines are showing lackluster growth. Even more encouraging is the fact that CMG has no long-term debt to speak of.

CMG’s growth in earnings per share, another key growth metric, clocked in at a very impressive 47%, much faster than the 27% growth it has recorded over the past five years.

Expansion Plans Should Boost Long-Term Growth

But perhaps the most encouraging indicator that CMG still has plenty of room to run is the fact that the company expects to open 4,000 new takeout locations that will be a scale-down version of its 1,831 exisiting restaurants.

The company opened 49 new stores during the last quarter and plans to open 190-205 new stores by the end of the year. CMG’s stores have been doing very well, posting average sales of $2.5 million during the quarter — a record for the company.

Chipotle Mexican Grill is also working on new concepts such as Pizzeria Locale, ShopHouse, and Food with Integrity, which can provide the company with new growth runways. Morning Star is of the view that Even though CMG already commands about 50% of the domestic $8-billion fast casual Mexican food category, Morningstar beleives the company still has the potential to grow store count to 5,000-6,000 locations.

Near-Term Pain for CMG Stock

Whereas the long-term outlook for Chipotle Mexican Grill remains good, the short-term outlook might not be so rosy. CMG stock mainly trades on the basis of strong growth, but investors might now be forced to adjust their expectations downwards.

The company jacked up food prices by a considerable margin in 2014 and is not likely to do so again anytime soon. This leaves it with little room to grow its revenue or operating margins this year through menu price increases.

With no significant near-term growth drivers, CMG stock is likely to remain depressed for much of the current year.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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