Hey licker, been a while. I sold my long position two years ago just above $30 and knew I made the right decision. I announced that sale in real time. I also traded STMP long (again, announced in real time) in the low $20s (but as a trade, not an investment). I was close to going long to hold strong when it went into the upper teens but didn't pull the trigger. Licker thought I was a short seller! Licker the melon growing shorty shouting maniac! Anyway, just checking in and even though I haven't read any of the posts, it looks like the Licker is still filling up the board. Well, I've raised my fair value estimate to the low and maybe even mid $20s on STMP, so maybe once it corrects down to that level I'll get long again, but I'm holding my nose at these levels. Gotta watch those insider sales too!
McDonald's has about 35,000 restaurants worldwide. It began with the burger fad in the 1950s. They had a small number of simple products and a new service model that improved throughput. Sound familiar?
The rate of new store openings is a key question along with sustainability of margins, overseas expansion potential, and additional concepts (Shophouse).
I think there is evidence that they may not be able to open much more than 200 stores per year domestically due to organizational capacity constraints. This constraint is primarily due to their company-owned model and commitment to internal development / culture. How many build-outs can you supervise? How many people can you train and monitor during start-up? How many managers can you develop and coach?
Furthermore, new locations will eventually begin to under-perform a bit as the best locations are saturated. This is inevitable.
Margins are the next concern. There is no current evidence of erosion, but competition ALWAYS comes.
Your opinion of the food doesn't bear on the company's prospects. It's obvious that millions of Americans love it and eat there regularly. I'm bearish on CMG stock, but the lines out the door can't be denied. I don't like Subway either. A slowdown is guaranteed due to the law of large numbers.
It has nothing to do with the people running this outfit, unless by "this outfit" you mean Yahoo! (or whatever third party Yahoo! may use for financial data). To me it looks like the financial data program simply switches to the next year's data for forward calculations upon a new year. Nothing shady.
I'm bearish (Sell) and even thought I think it's worth in the mid-$200s, I really doubt we see those prices. Chipotle will continue to attract a premium even if the market enters a bear market. Unless Chipotle has major internal problems and/or major competitive threats - neither of which is evident - they will trade at a premium to peers and the market. I think it could correct down into the low $300s. If that happened later this year then it would be trading at about 20x forward earnings, which isn't too high given the prospects.
Current valuation is priced beyond perfection. See my analysis elsewhere, including the "new stores" thread from a few days ago.
Settle down. Yahoo! seems to have a glitch and is showing no current year P/E. It is showing the forward P/E (below to the right on the main screen) as 33 and change (based on the median analyst earnings estimate for 2015).
Just a heads up that the 34x forward earnings is for the year ending Dec. 31, 2015. In other words, that's based on earnings for a period ending almost TWO years from now. It's amazing how the analysts stretch to try to make mo-mo stocks look less overpriced than they are.
Um, not really the way to do a valuation. First of all the profit is nominal and should grow with inflation. Secondly, simple payback is only a very rough measure.
But, whatever, CMG is way overvalued.
Looking at single year P/Es is meaningless, since they include one-time charges. "Analysts" on the Tee Vee like to use them as a short hand talking point, but they don't mean much. Stocks are valued on future free cash flows that extend forward many years.
See the "new stores" topic on this board during the past few days for more discussion of valuation. In that thread I provide details about why CMG is quite overvalued.
I'm bearish (Sell) but that's another misleading metric. When you buy CMG you're not just buying the existing stores. You're buying the existing stores plus all of the infrastructure needed to run a world class business and expand it rapidly and effectively. They have done a great job in many key areas including developing employees and promoting from within. That is VERY difficult to do, takes a long time, and provides real value. They've also got a top notch real estate team. Again, go out and try to scout retail real estate. It is difficult and it is critical.
Anyway, you're paying for free cash flow. The fact that they can build out for under $1MM per store and then crank $1.7MM per year revenue and drop several hundred thousand to the bottom line is impressive.
And it looks like CMG is going to beat the market today.
Again, I'm bearish on CMG, but the stock is performing very well on a day when major indexes are declining sharply.
So what. I'm bearish on CMG due to valuation, but the valuation is based on a long stream of anticipated future profits. Weather-related profit impact during one quarter is worth maybe a couple of cents off the stock price. It's a non-issue.
Today's CMG pullback is in line with the restaurant group. So it's neither bullish nor bearish.
CMG has outperformed peers, but after the big spike it seems to be trading with the group.
I've laid out the bear case - see the "new stores" thread if you want some details. But today's action is just in-line.
I don't think we'll see CMG break down until markets settle down AND slower growth shows up in CMG's numbers.
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".
I disagree. This is the end of the beginning for fast casual. The format is going to continue to gain strength. More and more people are embracing the format and loving the value.
So Chipotle has a nice tailwind and is the fast casual leader. But competition will really pick up steam. Eventually margins will suffer.
People always forget about the competitive response. It is a typical mistake. You are right to point it out.
It happens in EVERY industry. It is the core of capitalism.
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.)
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.