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Chipotle Mexican Grill, Inc. Message Board

  • thermo_bea thermo_bea Jan 31, 2014 11:50 AM Flag

    new stores

    A calm discussion is in order. The question of CMG's valuation really depends on two key factors:
    1) New store openings
    2) Margins

    If Chipotle cannot continually increase the annual RATE of store openings, then top line growth is going to slow down. That is just simple math. As the number of stores grows, then they need more store openings to maintain a rate of volume growth.

    There are three main issues around store openings:
    a) New concept(s), e.g. Shophouse
    b) Location quality
    c) Organizational capacity

    The jury is out on (a). It is very likely that new locations (b) will be a bit less favorable than existing ones: Companies focus on the very best locations first and then go to lower quality locations. The main issue is (c). It is quite likely Chipotle will not be able to open more than 200 stores per year. If they could, they would, but they've been stuck just under 200 for a couple years and are forecasting the same number this year. In order to maintain quality and culture, there is a limit. This is the tradeoff with the company-owned model.

    Thus, growth will probably slow. They have about 1,500 stores now. 200 new ones is 13% store growth. In five years they'll have 2,500 stores and 200 new ones will be 8% growth. It's just the law of large numbers.

    Margins are very high for their sector. It would be unprecedented if they could sustainably hold those margins against competition in the future.

    So growth will slow a bit and margins will probably fall a bit.

    Still a great company with great prospects. But at what cost?

    Everyone - longs and shorts - should do some quick math on what profits will probably look like in, say, 10 years and what growth will be then. Is today's stock price justified?

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    • I think CMG is a very well run company in a hot sector of the restaurant market. I personally like their food, but would not eat it 4 times a week as some on here have stated. To me, this is all about same store sales comps. They met EPS expectations. Revenue was up, but not enough to spur this kind of move in the stock. It was the 9% same store sales increase from Q4 2012. My question is, what happens when those comps get a little tougher. They have 1, maybe 2 more quarters of cakewalk comp numbers. After that, things get a little tougher. I'm glad I sold my March puts (for a 5% loss) before earnings. i"m sure they would be worthless if I hadn't. Good luck to all!

      • 1 Reply to johnlewman1
      • I agree with you. I think the spike in the stock price was due to three factors:
        1) Short squeeze. Some shorts were betting on disappointing earnings. When Chipotle met expectations, they rushed to cover.
        2) Flight to safety from emerging markets to U.S. companies little overseas exposure.
        3) Dearth of growth opportunities. Earnings growth is slowing and the restaurant sector is not doing well. CMG is one of the few exceptions and some investors are rushing into it.

        Basically investors are rushing into CMG less because of Chipotle's long-term prospects, but because it looks like a harbor during a storm. When other markets look appealing these investors will flee CMG. In other words, they are "weak hands".

        Sentiment: Sell

    • Thanks for trying to spur good discussion Thermo!!

      Everyone losing money likes to rant vs. have civil discourse. I just don't see the concern here on the 'valuation' that everyone is ridiculously harping on. Our PE is only in the 50's. We already have a forward P/E that is down in the mid 30's for 1 year from now. In 5 years, we could easily have a share price of 1,000 per share and a P/E of 20.

      I don't know what it is, but high price per share companies just seem to freak out the Simpleton's of the world as they just can't wrap their heads around price per share not being important. The see "Burrito Company is $500+ per share and freak out about it being way too expensive". If this thing did a 10-for-1 split and was $55, absolutely nothing would change about it's P/E, but I guarantee you that 75% of the 'naysayers' on here would go away.

      Don't get caught up in their uniformed rhetoric. It's about numbers... real value-- and as you posted-- growth, margins, capacity.

      Growth will be fine for the next few years IMHO. We aren't nearly at a critical mass to truly drag the numbers down. Analysts are informed people, so it isn't about keeping our %'s going as much as keeping up with or ahead of analysts. Real market analysts don't hang out on Yahoo MSG boards and make predictions and statements. 5 years from now we'll see analysts predicting 8% growth and maybe CMG can crush it by showing 9-10% growth still. Margins, are of concern and worth watching. I'm much more concerned about those. I'm also intrigued about the capacity question--- CMG is unlike anything we've seen in not allowing franchising, as well as having some true 'philosophy' behind their market strategy.

      I think our US indexes will average about 9-10% per year the next couple of years, and I think CMG can easily do 20% per year price return.

      Just some discussion for you. All IMHO.

      • 1 Reply to mwchingren
      • mwchingren,

        Thanks for your thoughts. I can understand your optimism for stock prices and CMG in particular. The U.S. economy is picking up while the rest of the world seems to be teetering. Chipotle stores are doing great business and expansions are on track.

        However, I think it is worth taking a step back from the numbers you propose.

        For example, CMG earned $10.47/shr in 2013. Analysts predict just under $13 in 2014 and $16 in 2015 (http://finance.yahoo.com/q/ae?s=CMG+Analyst+Estimates). This matches pretty well with the pace of store openings plus a small increase in existing store efficiency plus inflation (price increases).

        To have "a share price of 1,000 per share and a P/E of 20" in five years (2019), EPS would need to be $50/shr. That is not going to happen. Not even close. Taking a look at what 2020 EPS could be, let's assume margins remain at their peak levels and the pace of store openings even increases a bit to about 200/yr while inflation runs higher, at 3%. Stores will go from about 1,500 now to about 2,700 in 2020, an increase of 80%. Inflation will put about 15% on top of that. So let's call the increase a full 100% over the 2013 numbers or $26/shr in 2020. Putting a 20x forward multiple on that would give a stock price of $520 in 2019.

        Sure, maybe they can get additional operating leverage, since corporate and admin costs won't grow as fast. Maybe they could open stores even faster (against current evidence). Even then, maybe they could - very best case - earn $30 in 2020. 20x would indicate a share price of $600.

        (Also, if US indexes do 10%/yr while the nominal economy is growing around 5% - best case - then this will require corporate profits to grow faster than the economy, even though they are at the extreme high end of historical norms or P/E ratios must expand, even though they are already high by historical standards.)

        Good luck.

        Sentiment: Sell

    • They are the modern day "Subway"..Overly-aggressive growth strategy with very mediocre food..Cult-like following however and absurd level of institutional ownership keep this ship afloat-for now..Not too far out, this will go down just like the Titanic did..All bluff/bluster, no real substance..It's a restaurant company, pure and simple..Real world value, including projected (unrealistic) growth, is around $250/share today..Future value, if you want to project out a year or so, is arguably $325-350..Nice money to be made here for prudent bears.

      Sentiment: Strong Sell

      • 2 Replies to kmsmith08
      • Look, I think CMG is a sell too, but making spurious allegations about their prospects doesn't matter.

        The real question is what kind of multiple the market will put on CMG when (not if) top line and profit growth slow.

        Note too that investors are being driven into stable, domestic U.S. stocks right now. So CMG is in a sweet spot completely independent of their long-term prospects. Investors are dumping emerging markets (and companies with lots of exposure). This is all to the (temporary) benefit of CMG's price.

      • "very mediocre food...Cult-like following"

        Yep, people are always willing to stand in long lines for mediocre food. Ten years ago, I remember always seeing lines at Subway out the door.

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