Early last summer, I stopped by the corporate offices of
Chipotle Mexican Grill (
) in downtown Denver and had a great chat with the head of investor
relations. I've always been impressed with Chipotle's management,
and its food. The company's financials at the time of that meeting
were also quite tasty. It was opening dozens of new locations every
quarter; its comps had been growing consistently; and its
earnings-per-share was up 24 percent in the first quarter of 2013
and almost 30 percent in F2012.
Despite all of these positive numbers, I couldn't convince
myself to buy CMG that day. At $372 a share, its PE multiple was
pushing 40x trailing earnings. That's way above my comfort level,
so I decided to hold off. My cautiousness has saved me a great deal
of money over the years, but in the case of CMG, it cost me dearly.
The stock rallied in a big way. By the end of the year, it was well
over $500. In late-January, after Chipotle announced another 20
percent rise in earnings-per-share for F2013, it shot up another
$60 in a single day.
Chipotle was my biggest miss of 2013. Now, I'm worried that if I
don't get over my fears about its valuation, it could wind up being
my biggest miss of 2014, too. In fact, CMG is starting to bring
back unpleasant memories of the biggest miss of my career.
Back in 1992, I visited the headquarters of another budding
consumer brand that had turned a unique regional product into a
national craze. In that case, the company was located in Seattle
instead of Denver and it was selling gourmet coffee instead of
healthy Mexican food. I'm talking about Starbucks (
). It had recently come public at the time of my visit. Like
Chipotle these days, its stock seemed too "expensive" on a multiple
of trailing earnings to buy (I believe its PE was in the high-30s),
so I decided to wait until it cooled down a bit. It never did.
Since that fateful day 22 years ago, it has gone up 100-fold.
At its current price of $555, CMG's multiple is now north of 50x
earnings. That makes me very, very nervous, because it puts a
tremendous amount of pressure on the stock. Chipotle has to deliver
near-perfect results each and every quarter to avoid a major
sell-off (which happened twice in 2012). Nonetheless, I'm doing
everything I can to talk myself buying CMG--and not just because it
reminds me so much of Starbucks. Three other factors make me
believe that the stock will most likely continue to thrive and
could even hit $1000 in the not-too-distant future:
Chipotle does not franchise.
Franchising is the corporate equivalent of steroids. It boosts
growth quickly, but the side-effects can be deadly. By keeping all
of its locations company-owned, Chipotle will continue to grow
steadily while maintaining rigorous quality controls. Chipotle
customers know that they can walk into any location and get the
same high-quality fare. Thanks to that consistency, more and more
customers are doing so, too. Even though food costs went up last
year, Chipotle's same-store sales grew every quarter because of
increased traffic, with comps rising from one percent YOY in the
first quarter to almost 10 percent in the fourth.
Like Warren Buffett at Berkshire Hathaway, Chipotle's leaders have
refused to split the company's stock.
This is an increasingly popular approach. Corporate managements
from Google to Priceline to Biglari Holdings have adopted it, and
for good reason. While it's terrible for brokerages and investment
banks because it reduces a stock's trading volume (and their
commissions), it lessens volatility by pricing out bottom feeders
and fickle, short-term investors.
debt on its balance sheets and free cash flow of close to $300
million, Chipotle's visionary founder and co-CEO Steve Ells is
investing in new opportunities.
First, he launched the Asian fusion concept ShopHouse. Then, in
December, news broke that Chipotle had bought into the Pizzeria
Locale chain. I ate at the Pizzeria Locale in Denver this past
Friday and it is a potential homerun. The food not only came out
quickly, it was delicious--far better than the pizza at Texas' "Pie
Five," the fastest growing player in the hot fast-casual pizza
category. I'm sure Steve Ells will bring the same focus on quality,
consistency and prudent growth to ShopHouse and Pizzeria Locale
that he brought to Chipotle--and I fully expect both of these
ventures to feed healthy revenue streams into Chipotle's bottom
I don't question Ell's ability, or his business acumen. I do,
however, question my own intestinal fortitude when it comes to
buying his company's stock. Will I finally get over my nervousness
about Chipotle's valuation and get on board? Even after outlining
all the great things about it, and reliving my costly failure to
buy Starbucks in the 1990s, I'm still not sure...
I have no positions in any stocks mentioned, but may initiate a
long position in CMG over the next 72 hours. I wrote this article
myself, and it expresses my own opinions. I am not receiving
compensation for it. I have no business relationship with any
company whose stock is mentioned in this article.
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