Two Reasons Why Chipotle Mexican Grill Deserves the Premium

The meteoric rise of Chipotle Mexican Grill (CMG) over the past decade has been very impressive. The company has appreciated over 10,000% since it went public at $22. At roughly $728, the stock may seem expensive, however I think it still has more upside to offer. In my opinion, companies that focus greatly on customer experience tend to enjoy strong growth and given the quality of Chipotle brand, I still think the stock has more potential.

Despite the company growing its sales over tenfold over the last few years, it is still going strong and recording double-digit growth.
In Q2FY15, Chipotle Mexican Grill EPS was $4.45, $0.01 greater than the consensus estimate of $4.44. The company’s revenue, on the other hand, came in at $1.2 billion as compared to analyst estimate of $1.22 billion. This marked a stunning rise of over 14% in revenue which is impressive no matter how you look at it.

What’s even more impressive is the fact that the company still has a lot of room to expand its business. Chipotle’s management believes it can open roughly 3,000 more outlets in the U.S. and the company’s presence in the international market is still relatively small.

Chipotle is slowly expanding into Asian cuisine with its new ShopHouse initiative, and venturing into pizza with Pizzeria Locale. Given the company’s focus on brand quality and customer experience, I have no doubt that these initiatives will be a success. These initiatives will offer immense expanding opportunities to the company and will ensure strong revenue growth in the years to come.

Return of Pork

Carnitas plays a significant role for the company’s comparable sales as it is the most popular item on the Chipotle’s menu. But, due to the shortage of pork, the company has observed a large decline in traffic over the last few quarters.

However, Chipotle Mexican Grill finally finds a way to resolve pork shortage which began in January. The company partnerships with the new pork supplier, Karro Food Group, and started selling carnitas in most of their restaurants. According to a report from the company, the carnitas is available at 90% of its stores.

The company stated that the pork supplied by the Karro Foods meets all of the company’s animal welfare standards. The company will be sourcing more pork from this new supplier and expects to supply fully Carnitas to the restaurants before the end of 2015.

Also, the fact that Chipotle compromised same-store sales just because its pork supplier’s meat couldn’t meet its standards highlights the fact that brand quality is high up the company’s priorities list. The return of Carnitas should increase store traffic and drive same-store sales higher in the coming quarters.

Conclusion

Due to Chipotle’s huge potential in the international market as well as the U.S. market, I think the stock deserves a premium. While Chipotle is currently trading at almost 44x trailing earnings, I think it will grow into the valuation. Lagging same-store sales have kept a lid on Chipotle’s share price in the recent past. However, the return of Carnitas will likely reverse this trend. Thus, I still consider Chipotle a safe investment.
Published on Oct 8, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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