Is Chipotle’s Stock Undervalued?

-12.41%
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Trefis
CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

Chipotle Mexican Grill (NYSE:CMG), the leader in the fast casual U.S. restaurant industry, is in an excellent position at the moment, with 81% revenue growth in the last 3 years, from $2.27 billion in 2011 to $4.1 billion in 2014, and is driving more customer traffic than the competition.  Trefis estimates the company’s revenues to rise 24% year-over-year (y-o-y) to $5.09 billion in the fiscal 2015.

CMG’s stock has mushroomed up more than 4X over the last 5 years from $140 in 2010 to $615 in June 2015. In February 2015, the stock reached its highest ever level of $726 on account of excellent financial results for the fiscal 2014. However, despite continuing the strong momentum in the first quarter of the fiscal 2015, the stock dropped steeply and is now 18% below its peak price point, and is at its 11-month low.

cmg stock

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Trefis’ price estimate for CMG’s stock is $669, which is nearly 9% above the current market price. We think that, despite the stock not performing well recently, there are many reasons that indicate a strong future growth potential in this company.  Here’s why:

  • Interestingly, over the last 5 years, CMG’s stock has clearly outperformed the S&P 500 index, as well as S&P Restaurants combined index by a huge margin.  CMG’s stock grew by 338% over the last 5 years, whereas  the S&P 500 grew by only 97%.

CMG 1

 

Source: Chipotle Mexican Grill 10-K SEC filing 2014

  • Recently, Zacks, an investment research firm, changed Chipotle’s rating from ‘hold’ to ‘buy’, with a target price of $694 on the stock. This means the firm is estimating a potential upside of roughly 12% from the current market price. [1]
  • Chipotle has been posting strong comparable store sales numbers for the last 5-6 quarters. Moreover, the company’s robust revenue growth is an indicator that U.S. consumers are shifting more towards organic and healthier food options. The U.S. food industry has been facing stagnancy in the customer traffic over the last one year. The decline in traffic in the fast food industry has been offset by increasing customer count in the fast casual industry. Among the fast casual restaurants, Chipotle has driven most of the growth.

CMG rev growth

comp sales cmg

  • The decline in stock price after the latest Q1 earnings report was due to a slightly lower comparable sales growth than the market consensus. In Q1 2015, Chipotle reported an impressive comparable sales growth of 10.4%, however, it was below the last year’s figure of 13.4%. The reason behind this was a pork supply shortage in few areas. Considering the fact that it’s a short term factor, a positive report might drive the stock price higher in the future.

It would be interesting to see how the stock behaves after the release of the Q2 report, which is scheduled to be out on July 21, 2015. [2]

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Notes:
  1. Chipotle Mexican Grill rating increased to buy at Zacks []
  2. Chipotle Mexican Grill to announce second quarter 2015 results on July 21, 2015 []