Chipotle Mexican Grill (CMG) has become part of the mainstream and its stock has been a stellar performer to put it mildly. Investors have piled onto the stock faster than one of its burritos can give you heartburn. I enjoy going to this restaurant more than I would like to admit, but I would not buy the stock here.
Let me start off by saying that this company is doing very well and will continue to do so. I just think that the stock is priced for perfection and that a decent-sized pullback is in the offing. When a stock has almost tripled in a year, the risk of a correction grows stronger. It is difficult to write a negative article on a company that is doing so well, so let’s just call it “lukewarm.”
Rich Food, Rich Stock
The main reason I wouldn’t buy the stock now is the rich valuation. CMG is currently trading at 41.5x 2010 estimated profits of $5.47 per share. I don’t see how this valuation can be justified under many situations, but the market is willing to pay up for strong organic growth these days. This is the kind of price/earnings multiple you would expect to see on a hot technology or biotech stock, but is quite rare for a quick-service restaurant company.
As I said earlier, the company is still growing nicely, but analysts are only pegging growth to be in the 22% range for both 2010 and 2011. I would put a justifiable p/e ratio around 25-30x, which would be a range of $136.75 to $164.10, which is well below the current price of around $227. The stock is already down from a high of $262 as buyers got altitude sickness.
As long as current fundamentals hold, I would be a buyer somewhere in the $150-$160 range as those prices start to look reasonable based on next year’s estimates of $6.57. Of course, if the company were to miss analyst estimates for a quarter or two, all bets would be off as investors would rush for the exits sending the stock diving. The bottom line is that there is absolutely no room for error and even if the status quo holds, longs still might not make too much money. My advice would be to search for cheaper pastures.
Too Spicy For My Liking is an article from: 
