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Bull of the Day

Chipotle had increased its menu prices during the second quarter (for the first time in three years), in response to rising food costs but its customers did not care. Same-store sales jumped 17.3% for the quarter, driven primarily by increased traffic. Analysts loved the quarterly results and have increased their estimates and price target for the company.
Rising estimates sent CMG to Zacks Rank # 1 (Strong Buy) yesterday.

About the Company

Founded in 1993 and based in Denver, CO, Chipotle Mexican Grill Inc. (CMG - Analyst Report) operates fast-casual Mexican food restaurant chains in 35 states throughout the United States, the District of Columbia and Ontario, Canada and the U.K.
 
Menu Prices Increase

The company increased its menu prices by about 6.25% to 6.5% on average, starting in late April and finishing in late June, with the increase varying by market and by menu item. For example, steak prices were raised by about 9% on average, while chicken prices were raised about 5%.  

According to the management, apart from the slight shift from steak to chicken—which was expected by them—their customers have generally responded well so far to the price increases.

Strong Q2 Results and Improved Guidance

Chipotle reported its Q2 results on July 21. Revenues grew 28.6% year-over-year to $1.1 billion and beat the Zacks Consensus Estimate of $980.0 million by 7.1%. The upside was driven by higher comps growth and opening of 45 new restaurants.
 
Comparable sales growth was driven mainly by increased traffic and to a lesser extent from an increase in average check, including the benefit of the menu price increases. According to the company these results represent one of their strongest sales comps as a public company, second only to the Q1 of 2006, their very first quarter as a public company. 
 
Adjusted earnings of $3.50 per share also beat the Zacks Consensus Estimate of $3.05 per share by 14.8% and were up 24.1% year over year.
 
With the release of results, Chipotle also increased its comps guidance for 2014. The company now expects comps in the mid-teens range versus the previous expectation of high-single digits comps increase. They expect to open 180-195 restaurants during the full -year.

Is the Premium Valuation Justified?

Chipotle’s stock in not cheap! Its current trailing 12-month earnings multiple is 58.2x, representing a premium of 76.4% to the industry average. Per Zacks Research, the company s shares have traded in the range of 22.3x to 57.7x trailing 12-month earnings during the last five years.
 
However Chipotle’s valuation appears to be justified due to its continued strong sales growth despite tepid industry sales trends. With its innovative food culture, effective marketing and a strong business model, Chipotle has a lot of room of grow.
 
So far, they have been able to attract more and more new customers and keep their customers coming back. Further, the company is likely to realize the full benefit of menu prices increases from the third quarter onwards.
 
Also, the company still has a substantial untapped potential for growth, particularly in international markets. Per WSJ, at a $20 billion valuation, Chipotle is approaching two-thirds the size of Yum! Brands, which has a $33 billion market cap and more than 40,000 of its KFC, Pizza Hut and Taco Bell outlets in 125 countries around the world. Chipotle, by contrast, has just over 1,500 restaurants, only a handful of which are outside the U.S.
 
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