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Weighing The Pros And Cons Of Chipotle Mexican Grill

1375 words - 6 pages

Chipotle Mexican Grill (CMG) has been a standout performer in the restaurant industry for several years now. However, its shares fell by nearly 6% in a single session after investors weren’t too pleased with its recent earnings report. Altogether, the stock has corrected nearly 20% since its March high of $622.90. Can the stock bounce back from here? Or will it continue its slide? Let’s take a look at the pros and cons.

Pros

1. Quality food with integrity
The company is driven by a strong set of values, even if some of those decisions increase its costs internally. This is especially the case with the sourcing of its ingredients and meats. In fact, the high-quality ingredients and ...view middle of the document...

6 million was attributable to restaurants opened during the year. That compares to $304.7 million of sales from restaurants not yet in the comparable base in 2012, of which $134 million was attributable to restaurants opened during the year.

From only 481 stores nationwide in 2006, it has more than tripled its store count to 1639 at present, mostly in the United States. To put that into perspective, McDonald’s (MCD) has over 14,000 locations in the US and about 7,300 in Europe. This indicates the enormous growth potential that the company has domestically and internationally. If Chipotle can continue to find good locations to open new restaurants, it should be able to sustain its double-digit store-count growth well into the future.

But that’s not all, the company is also venturing into other food types. Last December, Chipotle announced it had bought a controlling stake in Pizzeria Locale, a Denver-based pizza chain. Furthermore, the company is also slowly positioning into the Asian cuisine market through its ShopHouse Southeast Asian Kitchen restaurant. Chipotle’s plans to leverage its platform into other categories by incorporating new concept restaurants could significantly help its worldwide growth.

3. Efficient and innovating operating model
Chipotle’s concise menu and swift assembly-line process for preparation makes its one of the most efficient operators in the industry. This maximizes its throughput (customers served per hour), a notable factor in its growing comparable-restaurant sales. During the first quarter of 2014, the company served as many as seven extra customers during peak hours as compared to the same period last year. This augurs well for Q2 and Q3, which tend to be busier periods of the year.

The efficient operation allows to make the most of its resources that, in turn, helps its to keep its costs low. There are three main costs in the restaurant industry, viz. food, labor, and occupancy. Comparing these three costs as a percent of sales, Chipotle’s total restaurant-level costs are among the lowest in the industry despite spending more on food, thereby enabling it to generate more profits.

4. Recent insider activity
Chipotle has a history of stock compensation and yet many of its key officers and directors purchase more of its shares. On April 22, Jeffrey Kindler, a member of the board of directors, bought 1,000 shares off the company’s common stock at prices between $509.50 and $510.00. Insiders are the most knowledgeable of the company’s overall position and their buying is usually indicative of their confidence in firm’s future growth.

Cons

1. Valuations
Chipotle currently sports a market value of a little over $15.55 billion. In the last five years, its shares have surged 510.6%, compared with 164.7%, 145.1% and 117.2%, respectively, of growth in Panera Bread (PNRA), Yum! Brands (YUM) and McDonald’s.

Despite a 20% pullback, Chipotle trades about 47 times its past earnings and about 31 times its future...

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