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Is Chipotle's Exponential Stock Growth Sustainable?
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Chipotle (CMG - Free Report) is a fast-casual restaurant that has outpaced its competitors, driving its growth by adapting to the millennial culture. CMG has seen gains of 63% for 2019 alone, with 52-week growth of 126%. These kinds of gains are unprecedented in this mature space, but Chipotle has been able to find its niche and expand on their competitive advantages.
The cultural shift that millennials have driven into successful business models is what’s galvanizing CMG’s MO. Our society has become exceedingly health conscious, wanting to know where our food is coming from and all the nutritional facts about it. Chipotle has catered to this by “sourcing the very best ingredients we can find and preparing them by hand” with “vegetables grown in healthy soil, and pork from pigs allowed to freely root and roam outdoors or in deeply bedded barns.” Chipotle’s defining competitive edge comes from its ability to provide a healthy well-balanced meal for a reasonable price.
Chipotle is also focusing on its digital presence, to resonate with the ease that millennials are becoming accustomed to. Their app allows users to place an order in the palm of their hand for pick-up or delivery. It lets you skip the lunch-rush line and go directly to the pick-up window for your meal. They also just brought back a digital reward system that should grow Chipotle’s loyal customer base.
Health Concerns
Chipotle’s “healthy” meal proposition was called into question with the E. coli outbreaks that almost destroyed the business. In November of 2015, an E. coli outbreak was spread across 11 states effecting at least 55 people (21 of which were reportedly hospitalized). Chipotle was forced to close all 2000 of its stores to discover the cause of this calamity. CMG dropped about 35% over a 2 month period following the outbreak and continued to trail down till it hit its trough in the beginning of 2018 falling 66% off its 2015 high.
Company Outlook
Still slightly off its 2015 high, Chipotle seemingly has the momentum to bust through its all-time high in the coming months. They have posted enormous gains in the past 3 years for a restaurant in this highly competitive environment. With 2017 and 2018 revenue growth of 14.7% and 8.7% respectively, and comparable store growth of 6.4% and 4% respectively.
Ever since their E. coli outbreak at the end of 2015, they have garnered their food from only the most reliable and health conscious sources. This has taken a toll on their margins for the past 3 years but this supply chain shift has given CMG growing trust and loyalty with its stakeholders. Chipotle has seen economies to scale since 2016 and with an ever increasing customer base, I see margins only growing further.
Chipotle has been growing its free-cash-flow over the last 3 years to the $334 million they posted at the end of 2018 giving CMG a vast amount of financial flexibility for expansion. The year-over-year EPS growth for 2019 and 2020 are expected to be an astounding 35.21% and 26.75% respectively, according to analysts. These have both been adjusted up recently, with 4 earnings beats over the last 4 quarters I can see these upward adjustments continuing.
The only thing that is holding me back from jumping into this fast-growing stock right now is its high valuation of 55x forward earnings and an over 3x forward earning-to-growth rate. These are both significantly above the industry average. I would like to see a cheaper valuation before I consider buying. I would look to buy at a price below $600 if fundamentals don’t change – Zacks Rank #4 (Buy).
Potential Competitive Buys
Starbucks (SBUX - Free Report) is a comparable company in the retail-restaurant space that has seen 15% growth in its stock price year-to-date and is trading at much more competitive multiples. Grant it they are only expecting 12.4% and 11.61% EPS growth in 2019 and 2020 respectively, compared to the excessive growth CMG is expecting it doesn’t look like much, but SBUX numbers are still solid for this industry – Zacks Rank #4 (Buy).
Bloomin’ Brands (BLMN - Free Report) is a comparable value opportunity for the retail-restaurant industry. Bloomin’ owns household name franchises like Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's. BLMN is trading at 13x forward earnings compared to the restaurant industry average of 22x forward earnings. This value investment comes very cheap considering there consistent/growing bottom line since its IPO in 2012 – Zacks Rank #2 (Buy).
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Is Chipotle's Exponential Stock Growth Sustainable?
Chipotle (CMG - Free Report) is a fast-casual restaurant that has outpaced its competitors, driving its growth by adapting to the millennial culture. CMG has seen gains of 63% for 2019 alone, with 52-week growth of 126%. These kinds of gains are unprecedented in this mature space, but Chipotle has been able to find its niche and expand on their competitive advantages.
The cultural shift that millennials have driven into successful business models is what’s galvanizing CMG’s MO. Our society has become exceedingly health conscious, wanting to know where our food is coming from and all the nutritional facts about it. Chipotle has catered to this by “sourcing the very best ingredients we can find and preparing them by hand” with “vegetables grown in healthy soil, and pork from pigs allowed to freely root and roam outdoors or in deeply bedded barns.” Chipotle’s defining competitive edge comes from its ability to provide a healthy well-balanced meal for a reasonable price.
Chipotle is also focusing on its digital presence, to resonate with the ease that millennials are becoming accustomed to. Their app allows users to place an order in the palm of their hand for pick-up or delivery. It lets you skip the lunch-rush line and go directly to the pick-up window for your meal. They also just brought back a digital reward system that should grow Chipotle’s loyal customer base.
Health Concerns
Chipotle’s “healthy” meal proposition was called into question with the E. coli outbreaks that almost destroyed the business. In November of 2015, an E. coli outbreak was spread across 11 states effecting at least 55 people (21 of which were reportedly hospitalized). Chipotle was forced to close all 2000 of its stores to discover the cause of this calamity. CMG dropped about 35% over a 2 month period following the outbreak and continued to trail down till it hit its trough in the beginning of 2018 falling 66% off its 2015 high.
Company Outlook
Still slightly off its 2015 high, Chipotle seemingly has the momentum to bust through its all-time high in the coming months. They have posted enormous gains in the past 3 years for a restaurant in this highly competitive environment. With 2017 and 2018 revenue growth of 14.7% and 8.7% respectively, and comparable store growth of 6.4% and 4% respectively.
Ever since their E. coli outbreak at the end of 2015, they have garnered their food from only the most reliable and health conscious sources. This has taken a toll on their margins for the past 3 years but this supply chain shift has given CMG growing trust and loyalty with its stakeholders. Chipotle has seen economies to scale since 2016 and with an ever increasing customer base, I see margins only growing further.
Chipotle has been growing its free-cash-flow over the last 3 years to the $334 million they posted at the end of 2018 giving CMG a vast amount of financial flexibility for expansion. The year-over-year EPS growth for 2019 and 2020 are expected to be an astounding 35.21% and 26.75% respectively, according to analysts. These have both been adjusted up recently, with 4 earnings beats over the last 4 quarters I can see these upward adjustments continuing.
The only thing that is holding me back from jumping into this fast-growing stock right now is its high valuation of 55x forward earnings and an over 3x forward earning-to-growth rate. These are both significantly above the industry average. I would like to see a cheaper valuation before I consider buying. I would look to buy at a price below $600 if fundamentals don’t change – Zacks Rank #4 (Buy).
Potential Competitive Buys
Starbucks (SBUX - Free Report) is a comparable company in the retail-restaurant space that has seen 15% growth in its stock price year-to-date and is trading at much more competitive multiples. Grant it they are only expecting 12.4% and 11.61% EPS growth in 2019 and 2020 respectively, compared to the excessive growth CMG is expecting it doesn’t look like much, but SBUX numbers are still solid for this industry – Zacks Rank #4 (Buy).
Bloomin’ Brands (BLMN - Free Report) is a comparable value opportunity for the retail-restaurant industry. Bloomin’ owns household name franchises like Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's. BLMN is trading at 13x forward earnings compared to the restaurant industry average of 22x forward earnings. This value investment comes very cheap considering there consistent/growing bottom line since its IPO in 2012 – Zacks Rank #2 (Buy).