Chipotle Still Sizzling

By Sham Gad | February 03, 2012 AAA

Chipotle Mexican Grill (NYSE:CMG) reported its financial results for the fourth quarter and full year ended Dec. 31, 2011. During the quarter, revenues increased by 23.7% to $597 million while net income grew by 24% to $58 million. Diluted EPS for the quarter was $1.81. Analysts were expecting EPS of $1.83 in the quarter on revenues of $591 million.

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No Surprises
The fact that Chipotle beat estimates on the revenue front and missed on the EPS estimate is really no surprise. The strong sales figures had to absorb higher food costs during the quarter, which came in at 32.2%, up 1.2 percentage points as a result of higher commodity costs. For the full year, food costs were up nearly 2 percentage points.

Yet thanks to strong customer traffic and stronger sales volume, overall restaurant operating margins were 26%, down only 70 basis points as higher food costs were somewhat mitigated by stronger restaurant sales. Chipotle ended the year with 1,230 restaurants, opening 150 new location in 2011, including one ShopHouse, the company's newest concept. (For related reading, see How To Analyze Restaurant Stocks.)

Still Sizzling
Looking ahead in 2012, Chipotle plans to open between 155-165 new restaurants. The company is forecasting mid-single-digit comparable restaurant sales growth. That compares with 11% comp sales in 2012. This forecast is likely a very conservative figure.

Unfortunately, while the business of Chipotle will likely do very well in 2012, an investment in Chipotle may not be as hot. After hours, shares declined 2% on the earnings news. Still, Chipotle remains one of the most expensive restaurant stocks trading at over 55 times 2011 earnings. While Chipotle's amazing growth is deserving of a strong valuation, shares of Bread Company (Nasdaq:PNRA) trades for 33 times 2011 earnings.

Even Starbucks (Nasdaq:SBUX), which is enjoying a great comeback thanks to the return of founder Schultz trades at half the valuation of Chipotle. It's even hard to ignore McDonald's (NYSE:MCD), Chipotle's former parent, trading at about 19 times earnings and yielding 2.8%. McDonald's is not growing like Chipotle, but Mickey D's is thriving in this environment.

Chipotle is an excellent business thriving in a very tough industry. It's doubtful that any restaurant or hospitality business can match Chipotle's growth at the moment, and Wall Street has elevated the share price to new highs as a result. While even a slowdown in Chipotle's growth would be viewed as excellent growth in the restaurant industry, Chipotle's valuation may cool off if the company is entering the next phase of its growth cycle.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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