The Uber-Growthy Days of Chipotle Stock Are Gone

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The danger with investing in restaurants may be apparent once again. Fast-growing restaurant chains like Chipotle Mexican Grill, Inc. (CMG) have always scared me, and I’ve never invested in them (including Chipotle stock, for that matter) because they tend to grow very quickly and the stock tends to skyrocket.

The Uber-Growthy Days of Chipotle Stock Are GoneInevitably, however, those 60% EPS growth rates become 40% and then 25% … and then bad things happen to the stock when they fall below that.

So while I kick myself as shares soar, I feel much better when a day like Wednesday rolls around for Chipotle stock.

Chipotle Earnings

Let’s see what the most recently released numbers at CMG tell us.

  • Revenues up 12.2% to $1.2 billion
  • Net income up 10.8% to $144.9 million
  • Diluted earnings per share up 10.6% to $4.59
  • Comparable-restaurant sales up 2.6%
  • Restaurant-level operating margin down 50 basis points to 28.3%

The revenue increase is nothing to scoff at. That’s a fabulous number, albeit lower than the mega-growth days that powered Chipotle stock into the stratosphere. But revenue numbers on their own in restaurants mean little without the same-store sales data, and that was not at all encouraging.

In contrast, a 2.6% same-store sales increase is what we see with mature restaurants. And Chipotle certainly seems mature when you consider that it increased its store base by a mere 2.5% in the quarter.

So my concern that CMG is transitioning out of mega-growth or even rapid growth into more stalwart territory seems to have a few elements of support.

Margins fell a bit at CMG, which is not a disaster unless it becomes a trend. But with net income and EPS growing at just under 11% at CMG, that’s another big signal that the big growth days may be over.

But we also have to view this quarter in context with the nine-month numbers for CMG. Let’s examine those.

  • Revenue up 15.3% to $3.5 billion
  • Net income up 25.8% to $407.7 million
  • Diluted earnings per share up 25.6% to $12.92
  • Comparable restaurant sales up 5.5%
  • Restaurant-level operating margin up 50 basis points to 27.9%

So obviously, Q3 was a drag on earlier quarters this year. Again, the revenue number is outstanding. The margin situation also looks better. But comps were significantly higher earlier in the year, so the slowdown is of concern. Were I an investor, I’d be watching these very carefully going forward.

And — uh oh! —  look at the net income and EPS growth. It was close to 26%, meaning that this quarter’s result of 11% is downright depressing in comparison. So now we have to worry as to whether this was just a fluke or a trend beginning.

Finally, we turn to guidance, and that’s definitely of concern. Management says to expect low- to mid-single-digit cops for FY15 and for FY16.

What Should You Do With Chipotle Stock?

Now, it’s not like CMG is in trouble. Chipotle is a very strong operation, with $1.23 billion in cash and no long-term debt. The company has brilliantly managed expansion without ever drawing down debt.

But if growth is slowing, then the price-to-earnings ratio is going to contract. Before the market closed on Tuesday, Chipotle stock was trading at a $22 billion valuation, or about 41 times trailing 12-month earnings.

If I believed CMG could maintain true EPS growth of 20%, paying as much as 40 times earnings wouldn’t be unreasonable.

But considering all the evidence of slowing growth, I’m uncomfortable — and I would stay away from Chipotle stock right now.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/chipotle-stock-cmg-growth/.

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