2023-06-01 11:20:54 ET
Summary
- As long-time supporters of Chipotle Mexican Grill, Inc., our experiences have declined as of late, what would Peter Lynch say?
- Chipotle Mexican Grill's profits have increased, but the company increased its prices substantially and got a COVID-19 recovery boost, we don't expect that to continue.
- Chipotle Mexican Grill, Inc. stock trades at a high valuation, a valuation that needs substantial continued growth, making the company overvalued in our view.
Peter Lynch is known for the popular phrase "buy what you know." He popularized the idea of investing in companies that you understand, which might be hidden gems. However, we now take an opposite approach. We use the approach of what you see on a day-to-day basis to discuss why we're against investing in Chipotle Mexican Grill, Inc. ( CMG ).
Chipotle Performance
The company did have strong YoY performance, but with an almost $60 billion market cap, it needs more.
The company earned $2.4 billion revenue in the quarter, with a 10.9% increase in comparable restaurant sales. Digital sales have continued to grow, and the revenue growth resulted in a growth in margins to 15.5%. The company's earnings per share increased 84.2% to $10.5, but annualized that still gives the company a P/E of 50.
That's incredibly high. The company opened 41 new restaurants, which will support continued growth, but we expect the slowdown in the company's comparable restaurant sales to slow down as the excitement of the market slows down.
Chipotle - An In-Person Experience
Where we're located has 3 Chipotle stores nearby, in 3 different directions, each a roughly 10 min drive. I've been a semi-regular customer of Chipotle (2-3x / month) since the early-2010s, with periods of higher and lower frequency. There was a time period where my consumption hit 3-4x a week, and for better or worse I never cared much about the E. Coli issue.
Outside of the changes made from the E. Coli scare, which we understand but weren't a fan of, we've chronicled some interesting statistics from our prior visits over the last 3-months across these Chipotle locations.
Total Visits | 11 |
Visits without Fajitas | 6 |
Visits without Queso | 3 |
Visits with online ordering only | 7 |
Portion Size Variance (per weighing bowl post the same order) | 200% |
This is based on our standard order. From our perspective, going to Chipotle has become a much more volatile experience. Don't get us wrong. This is a single person in a single geographic region. However, it's concerning. An online only order means you have to get to the store, see the sign on the door, order, and wait 15 min minimum.
No fajitas and queso, a standard part of our order, is workable. For vegetarians, it's more of a problem. Portion size variance makes for a volatile experience and hurts people's expectations. Overall, it's something we haven't seen with any other major fast food chain in the area, and for us, it's a cause for concern about the company's long-term prospects.
Friends we talk to regularly prefer Qdoba for a better experience.
Chipotle Valuation
Chipotle expects to handily continue its growth
The company has 270 new restaurant openings planned for the year, counting relocations. The true number is more like 255. That means the company plans to run up its opening rate versus earlier in the year, with more than 200 locations planned to open in the remaining 3 quarters of the year. The company assumes delays do not worsen.
Chipotle Mexican Grill, Inc. needs substantial growth to continue strong returns. It needs to more than double its profits to justify its valuation, and that would still put it at the same level as peers like McDonald's Corporation (MCD) that are more expensive, with much longer history. We don't see that growth continuing, especially as the company loses the ability to continue its price increases.
Thesis Risk
The largest risk to our thesis is Chipotle is still a growing company. New stores are opening, the company is introducing drive-through lanes, and same-store sales are increasing. Growing revenues, and continued growth of the business, despite our qualms, could enable the company to justify its valuation and provide shareholder returns.
Conclusion
Chipotle Mexican Grill, Inc. took the remaining good will, in our view, increasing prices substantially. The company's quality and availability of ingredients has declined of late, and especially with vegetarians in our family, the disappearance of the availability of key ingredients is tough to see. What would Peter Lynch say? We use that to inform our investment.
Looking at Chipotle Mexican Grill, Inc.'s valuation, it has a P/E of >50, showing that shareholders expect substantial growth. We don't see a path to that. Recent earnings were supported by a COVID-19 recovery and prices rises which we don't see evidence of their ability to continue. As a result, we recommend against investing in Chipotle Mexican Grill, Inc. at this time.
For further details see:
Chipotle Mexican Grill's Long-Term Weakness - A Peter Lynch Take