Following the earnings report for Chipotle (CMG - Free Report) last night, investors seemed to be putting the troubled company back in their good graces. After all, CMG did manage to beat expectations on both the top and bottom lines, crushing EPS estimates by 25%.
We saw articles lauding the company’s strong same store sales growth , as well as Jim Cramer noting that the company is ‘back and it’s bigger than ever’, stating that the ‘business will only get strong as the year goes on’, according to thestreet.com . And while Chipotle definitely posted some nice same store sales numbers compared to a year ago—including growth of 17.8%-- is this really a fair comparison, or an accurate measure of CMG’s return to glory?
Let’s not forget that a year ago the company was deep in a food safety scare and saw revenues of just $834 million, the lowest level since the first quarter of 2013. And while EPS was up significantly year-over-year as well—going from a loss in Q1 2016 to a $1.60/share profit this quarter—investors should also consider where the company was before the food scandal took place too.
From those numbers, Chipotle basically hasn’t done anything at all. Take a look at revenue and EPS from Q1 in 2015, before the words ‘food safety’ and ‘Chipotle’ were tied together. In that quarter, CMG earned $3.88/share and saw revenues of $1,089 million. So, how are today’s growth rates looking now with this context?
Pretty terrible if you ask me.
Chipotle hasn’t grown revenues at all since Q1 2015, and its EPS is still well below its 2015 level too. In fact, Chipotle was earning almost 46% more per share in Q1 2013 than it is today!
So, Why Is It a Growth Stock?
For whatever reason, people are still putting Chipotle into the category of ‘incredible growth stock’ that is usually occupied by tech companies. Yes, Chipotle disrupted the fast-casual market years ago, but it has gone nowhere since that initial burst. As one analyst, Standpoint Research’s Ronnie Moas, said , "Chipotle is being treated like it's an "Amazon, Tesla, Apple, or Google, when in fact all they do is make burritos.”
Right now, shares have a forward PE of 57.8. That is close to four times as high as Apple (AAPL - Free Report) , nearly double Facebook (FB - Free Report) or Alphabet (GOOGL - Free Report) . And remember, this is for a company that hasn’t grown EPS in ages.
This trend is kind of an outlier in the restaurant world too, so you can’t even make the excuse that it is a sector wide problem. The industry does have a sluggish rank right now, but behemoth McDonald’s has grown earnings per share by over 33% since the first quarter of 2015, while rivals Jack in the Box (JACK - Free Report) which owns Qdoba (a similar burrito chain but with tasty breakfast burritos as well), and healthier option Panera PNRA have seen solid growth rates too. If anything, Domino’s (DPZ - Free Report) could offer a good comparison, thanks to its rich PE and focus on innovation, but (as you can see in the chart below) the company has been a great investment and has grown earnings time and time again.
And yes, we currently have an ‘A’ Grade for Growth on CMG, but I think it falls into that one-year look trap as well. Take a two year look for these metrics and it doesn’t become nearly as favorable. Plus, with an overall grade of ‘C’, and not to mention a value score of ‘F’, this doesn’t exactly have a compelling profile from a fundamental look, especially with a Zacks Rank #3 (Hold), and recent estimate cuts from analysts as well.
Don’t get too excited about the recent report from Chipotle, the company still has a very long way to go when it comes to justifying its absurd PE multiple. The stock is being treated like are a high tech player, when in reality they are in the cutthroat world of fast casual dining instead. Plus, while their assembly line concept was revolutionary, new ideas since then have been few and far between, leaving them to come up with items like ‘bunuelos’ or fried tortilla strips with sweet toppings , as their ‘innovation’ now.
To me, getting back to where you were two years ago is no reason to believe that CMG is a top growth story again, or that the company is back and bigger than ever. This is especially true with recent worries about a possible data breach as well , as now data safety is something is called into question for the company too.
And it isn’t like a massive surge in earnings is projected in the near future either. Current estimates for the coming quarters include $2.53/share for the summer and $2.46/share for the fall. These figures are still below where they were two years ago, so investors looking for growth might have to wait a little longer.
So, the bottom line to me is that if you want a restaurant stock, get one that is growing earnings and revenues, and isn’t plagued by safety issues from multiple angles. And if you want a high tech, high growth company, the tech sector—or at least a company like Domino’s (DPZ - Free Report) which is heavily reliant on tech at this point—is probably the better place to go right now. These days, Chipotle isn’t doing either one very well.
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