Understanding What Drove Chipotle’s 4Q15 Valuation
How Deep is E. Coli's Impact on Chipotle's Stock?
Valuation driver
Following the E. coli incident, Chipotle Mexican Grill (CMG) lowered its diluted EPS (earnings per share) guidance to range from $2.45–$2.85 per share in 4Q15 compared to $3.84 in 4Q14. Earlier in this series, we looked at how Chipotle’s earnings per share were projected to fall over the next four quarters.
EPS impacts share price
The stock price for Chipotle (CMG) has moved in tandem with the company’s forward PE ratio. Forward PE, or price-to-earnings ratio, is calculated by taking the company’s current share price over the next 12-month EPS.
The E. coli incidents have negatively impacted the company’s next 12-month growth, which is reflected by the steep fall in the company’s valuation multiple.
Valuation multiple driver
The above chart shows how the valuation multiple PE has closely trended with Chipotle’s sales growth. We saw earlier that the company’s sales growth was mostly driven by its same-store sales growth. This is why investors must closely track the same-store sales growth metric for Chipotle, as well as other restaurants such as Domino’s (DPZ), Brinker International (EAT), Darden Restaurants (DRI), and Panera Bread (PNRA).
You may access some of these restaurants through the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY holds about 10% of restaurant stocks as a percentage of its total portfolio.
Next, we will compare Chipotle’s valuation multiple with its peers such as those mentioned above.
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