Is Chipotle Mexican Grill Still Attractive?CMG) announced fourth quarter ended December 31, 2015 total revenue of $997.5 million, down 7 percent year-over-year from $1.1 billion during the same period last year.
Not in good shape
Chipotle declared fourth quarter of 2015 net income of $67.8 million or $2.17 per diluted share, down 44 percent year-over-year from $121.2 million or $3.84 per diluted share in fourth quarter of 2014.
The fast food Mexican company reported continued year-over-year decline in both its top and bottom lines primarily due to 14.6% decline in comparable store sales.
David Tarantino, a key analyst at Robert Baird estimates the demand for foods at Chipotle restaurants to grow significantly and thus, enhance the number of restaurants at key locations coupled with starting to completely utilize the key concept of “Food With Integrity”.
The restaurant level operating margin for fourth quarter of 2015 declined 700 basis points to 19.6%, mainly driven by non-recurring expenditures linked to recent incidents of the food-borne diseases and notable decline in comparable restaurant sales, somewhat offset by encouraging food costs.
The latest news about food-borne related incidents linked to Chipotle is believed to downgrade the company’s image as a healthy fast food provider in the eyes of customers and thus, having a long-lasting impact on the company’s top line growth although Chipotle is keenly focused on enhancing sales through increasingly opening new restaurant chains at strategic locations.
During the quarter, Chipotle uniquely opened 79 fresh restaurants, thus making the overall restaurant count to about 2,010. Further, the company achieved significant cost reduction benefits for its key foods with food costs having recorded at 33.8% of top line, a decline of 120 basis points as against the fourth quarter of 2014, primarily driven by price reductions of beef, avocado and dairy products coupled with the advantage of the growth in key menu prices, somewhat offset by expenses linked to food testing and wastage.
Broad administrative expenditures were nearly 4.7% of top line, a decline of 100 basis points owing to the weaker non-cash stock-related compensation spending and bonus expenses, somewhat offset by better wages as the company grew.
Chipotle is expected to achieve significant cost benefits from declining input costs including, reduction in key raw material costs such as beef, dairy products and avocado as well as notably reducing general and administrative expenses.
Importantly, the Board of Directors at Chipotle Mexican Grill, Inc. has allowed the strategic investment of an extra and limited by $300 million, without commissions, to buy back shares of its common stock. Along with this share buyback authorization, the company has an additional nearly $178 million accessible till January 31 for buybacks under earlier declared buyback authorizations which is liable to change.
Going forward into the fiscal year 2016, Chipotle is focused on opening approximately 220 to 235 new restaurants and delivering effective complete year tax rate of about 39.0%.
The superior dividend distribution strategy of Chipotle to increasingly offer attractive shareholder returns in form of dividends and share repurchases is estimated to further attract key investors investing hugely into the stock and thus, encouraging it to continue with its expansion plans at an accelerated pace and over the years.
Overall, the investors are advised to “Buy” equity in Chipotle Mexican Grill, Inc. looking at the company’s attractive financial position with significant total cash of $663.20 million and no short-term or long-term debt, encouraging the company to make future growth investments. The profit margin of 10.57% seems impressive. The PEG ratio of 3.70 indicates significant company growth and comparable to the industry’s growth average of 1.39. The trailing P/E and forward P/E ratios of 30.56 and 31.22 respectively signify logical stock’s valuation which is comparable to the industry’s average P/E of 22.82.
Published on Feb 17, 2016By Vinay Singh