Once a part of McDonald’s Corporation (NYSE:MCD), Chipotle Mexican Grill, Inc. (NYSE:CMG) has come a long way since being spun off in 2006. Back in 2006, Chipotle shares saw an IPO price of $22 with only 450 stores nationwide to its current share price of $543 and now sees its total store tally come in around 1595 stores between US, UK, and Canada. With shares up over 2300% since its IPO, can the “fast-casual” dining stock continue its run? Considering its latest earnings release on January 30th and management’s plans for future growth and international expansion, Chipotle bulls are confident.
On January 30, 2014, Chipotle reported fourth quarter 2013 earnings per share of $2.53 on revenue of $844.1 million. Analysts were estimating results to come in at $2.52 per share on revenue of $826.3 million. This earnings beat sent shares up 12% for the day, snapping the stock’s poor performance from the start of the year. Year over year revenue was up 17%, another impressive gain and highlights the stock’s growth nature.
Moving forward, management has a few other plans for the business that surprisingly, do not include its traditional taco and burrito menu offerings. Instead, the company will be venturing into other food types, most notably pizza and Asian cuisine with international expansion in mind. Back in December, Chipotle announced it had bought a controlling stake in a Denver pizza chain, Pizzeria Locale. Ironically, Pizzeria Locale has a similar model to Chipotle’s in that customers can build their own pizzas in an assembly line-like fashion. The restaurant says it can then cook its customer customized pizza in two minutes but utilizing ovens with temperatures around 1000 degrees.
As for the company’s positioning into the Asian cuisine market, Chipotle has been slowly expanding its ShopHouse Southeast Asian Kitchen restaurant, which are currently located in California and Washington D.C. The ShopHouse restaurants will feature foods from Southeast Asian countries such as Singapore, Vietnam, Thailand, Malaysia, etc. While management is upbeat on the initial customer response to the new concept, they do not seem hurried to open new locations throughout the US. Steve Ellis, co-CEO and founder of Chipotle was particularly upbeat on the new ShopHouse restaurants saying, “The response we have seen to ShopHouse reminds me very much of what I saw when I opened the very first Chipotle”.
Despite Chipotle’s plans for international expansion and entry into new markets, analysts continue to be wary of the stock’s valuation, which have led to several downgrades recently. According to Schaeffer’s Research, shares of Chipotle were downgraded earlier last month by analysts at Wedbush from outperform to neutral. Additionally, analysts at Oppenheimer took a similar stance by downgrading the stock from outperform to neutral.
However, there were also some analysts that took the earnings announcement and recent developments as a sign of continued bullishness. Analysts at Barclays rose its price target from $452 to $520, while maintaining its “equal weight” rating. Piper Jaffray also took to the airwaves to up its price target on Chipotle from $480 to $550.
While performance of Chipotle shares have been exceptional over the past few years, long term bulls were tested in 2012, when the stock peaked around $435 and nose-dived down to below $250. Subscribers of risk management service, SmartStops.net, were alerted in late June 2012 of elevated risk when Chipotle was still trading around $360, just before the major declines took place. Later that year, subscribers were again alerted in late October 2012, around $230 a share, before shares slipped to its final bottom around $238. All in all, subscribers that took action were able to avoid almost $200 per share in declines. This shows the value of being prepared and taking action to help limit losses and ultimately retain your hard earned profits.
In the end, Chipotle must continue in search of new sources of growth as its traditional business nears peak saturation. Plans for international expansion and into new markets in the US should help keep growth stable. However, with shares trading at 55 times earnings, analysts are right to highlight the risks in the short term. Investors must remain diligent and protect profits before they evaporate.