Chipotle to collapse like a wet taco
Posted
Oct 25 2007, 05:19 PM
by
Robert Walberg
Help me out here people. How is it that Chipotle Mexican Grill's stock can soar to new heights -- up by a gut-busting 126% over the past year -- while the rest of the casual restaurant industry is experiencing a bad case of indigestion? Now I like a one-pound burrito as much as the next guy, but there's nothing that really separates Chipotle from the rest of the not-so-fast food Mexican chains such as Qdoba Grill (owned by Jack in the Box) and Moe's Southwest Grill (operated by franchisor Focus Brands). They all use fresh ingredients at a comparable cost served in a pleasant yet unspectacular atmosphere.
Maybe it's just that American consumers are growing tired of soup and sandwiches and are merely looking for something, and some where, different to eat. That might help to explain why Chipotle is forecasting comparable same-store sales growth in the high single, low double-digit area, while Panera Bread recently lowered its guidance to under 1%. Talk about your flat bread!
Chipotle's sensational earnings growth is the principle reason for the stock's sizzling performance. Look for the stock to be red hot again tomorrow, as the company was added to the S&P MidCap 400 after Thursday's close, making a run to new high ground a good bet over the near-term.
However, after feasting on tomorrow's gain, investors might just want to head for the exits as there are a number of issues that could put at least a temporary end to the company's growth story. FIrst, the fires in the California have destroyed much of the avocado crop. Combined with the general rise in food prices (for ingredients like meat and cheese), the hit to the avocado fields could squeeze operating margins going forward.
Second, the state of the economy is compelling many people that used to eat out to stay at home -- at least a little more often. Given that Chipotle serves the lower end of the price spectrum, the company won't get hit as bad as say P.F. Chang's China Bistro, which recently guided lower due in part to slower traffic, but even a slight slippage could cause future growth to disappoint analysts and investors that are used to strong numbers.
That brings us to our last concern -- valuation. Chipotle trades at about 50 times next year's estimated earnings -- well above industry and market levels. Consequently, even the slightest disappointment could take a big bite out of the stock price. Even at 40x next year's earnings the stock has downside to the $100 area.
About the only thing that concerns me is that there are a growing number of skeptics (see social picks and Jim Cramer), and I generally prefer to be ahead of the crowd. Nevertheless, there are simply too many risks and not enough reward at these levels to stick with the stock.
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