Chipotle Mexican Grill, Inc. (NYSE: CMG) has had an absolutely amazing run.
Since going public in January 2006, the highly successful Mexican fast-casual chain has seen its stock soar nearly 1,440%. A mere $2,500 invested at the IPO price of $45 would be worth more than $38,000 today.
But with its stock price fast approaching $680, how much more upside can Chipotle really have? Well, you may find this hard to believe, but it’s not out of the realm of possibility for shares to more than double in coming years.
Essentially, if all goes well, we could relatively soon see Chipotle surpass $1,500 a share.
Although highly intangible, reputation is as potent a catalyst as any for this sort of price appreciation. Simply put, Chipotle is pretty much number one in the fast-casual space and has done more than any other major fast food chain to meet the growing demand for healthy menu items made with fresh, high-quality, organic ingredients.
To achieve this, Chipotle buys primarily from small local farmers who are “good stewards of their land.” Management defines “local” as within 350 miles of each restaurant. Not only is this ultimately better for the environment, but it gives Chipotle the advantage in price negotiations. With a market capitalization of $21 billion, the company may be less than one-fourth the size of fast-food king McDonald’s. But in comparison to its suppliers, Chipotle is enormous.
Frankly, though, I doubt Chipotle will ever achieve anything near the scale of McDonald’s, which has 37,500 locations (mainly franchises) in 120 countries. And that’s simply because McDonald’s menu is far more varied and probably more universally appealing -- despite the number of unhealthy, processed food choices available.
Even though Chipotle’s market value already places it well into the large-cap category, with only about 1,700 locations in North America, the U.K., France and Germany, Chipotle is small by comparison.
Despite that, the company likely has far more growth ahead for a couple reasons.
For one thing, comparable store sales growth is very strong, jumping more than 17% in Q2. This occurred despite an across-the-board price hike at the start of the quarter -- a strong sign Chipotle’s customers are loyal and willing to pay more for its products.
What’s more, management recently raised its guidance for comp growth to the mid-teens from the high single-digits for the rest of 2014.
McDonald’s, on the other hand, saw its comps rise barely 1% last year and actually fall 2.5% in July. The company may end up seeing no comp growth at all this year.
At this stage in its development, Chipotle will likely maintain strong comp growth as it presses forward with aggressive expansion plans. The firm opened 89 new stores in the first half of 2014, which keeps it near its target of at least 185 openings a year until it has 3,200 locations. At the current pace, Chipotle could hit that goal in around eight years.
Let’s assume it does -- and average sales per store conservatively climb 6% a year to $3.2 million in 2022 from about $2 million currently. In this scenario, annual revenues would almost triple in eight years to roughly $10.2 billion from $3.6 billion now.
If you look at it that way, Chipotle appears plenty capable of growing earnings by the consensus estimate of 24% a year for the next five years -- about the same growth rate it achieved during the past five years. The consensus projection for an earnings multiple of 50 is feasible since shares of Chipotle now trade for 63 times earnings of $10.66 a share.
Thus, the stock has nearly 130% upside potential to about $1,560 a share sometime in 2019.
Risks to Consider: Any stock with such sky-high valuations would be considered at high risk for a major pullback, including Chipotle.
Action to Take --> Chipotle is one of those stocks that defies gravity. And as I alluded to earlier, intangibles probably have a lot to do with this. The company offers something so many consumers want -- “food with integrity.” So they’re often willing to pay a substantial premium for the company’s food and an even larger one for its stock. Fine execution means a lot, too. I’m among Chipotle’s many regular customers, and I’ve always found the service quick and the menu, though very simple, to be top-notch for a fast-food setting. However, with such rich valuations, the stock is probably only suitable for momentum investors with the highest risk tolerance. The last good buying opportunity occurred in March, when the price fell more than 20% during the broader sell-off in momentum stocks. It might be best to wait for a correction like that again before starting or adding to a position in Chipotle.
In 2007 Chipotle was valued at around $50 a share. Now it trades at more than $650 a share. A few years ago, InvestingAnswer’s would consider Chipotle an Undiscovered Growth Stock. We have identified many companies, like Chipotle, that are expected to experience huge gains in a short amount of time… we call them “Hidden Gems.” To learn the name and ticker symbols of a few of these firms, click here.