Chipotle Mexican Grill (NYSE:) has risen substantially since its 2006 IPO — its stock is up about 528% from the $46 it traded at back in January 2006 to its current $289. But it missed estimates in its most recent quarter. Can Chipotle recover and run up more?
Here are three reasons that you might consider buying Chipotle:
- Good earnings reports. Chipotle has been able beat analysts’ expectations fairly consistently and has done so in . But in the quarter ending June 2011, Chipotle missed estimates of $1.68 by nine cents per share.
- Increasing sales and profits and cash-rich balance sheet. Chipotle has been increasing sales and profits. Its revenue has grown at a 22.3% annual rate, from $823 million (2006) to $1.84 billion (2010), while its net income has increased at a 44% annual rate, from $41 million (2006) to $179 million (2010) — yielding a 10% net profit margin. It has no long-term debt, and its cash rose at an annual rate of 9.9%, from $154 million (2006) to $225 million (2010).
- Out-earning its cost of capital. Chipotle is earning more than its cost of capital — and it’s progressing. How so? It’s producing EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, Chipotle’s EVA momentum was 3%, based on six months’ annualized 2010 revenue of $1.8 billion, and EVA that rose from six months’ annualized 2010 $91 million to six months’ annualized 2011 $109 million, using an 8% weighted average cost of capital.
One reason to hesitate:
- Chipotle’s high valuation. Chipotle’s price/earnings-to-growth ratio of 1.76 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It , and its earnings per share are expected to .
This is an expensive stock, so I would consider buying it on a big dip. If it misses earnings expectations in the next quarter, that could create a buying opportunity or signal that investors should avoid this stock. It all depends on whether Chipotle can execute a turnaround plan.
Peter Cohan has no financial interest in the securities mentioned.
