Is Chipotle’s Stock Better Than This Peer?

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CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

 

We think that Chipotle Mexican Grill‘s stock (NYSE: CMG), currently is a similar pick compared to Texas Roadhouse’s stock (NASDAQ: TXRH). Chipotle’s stock trades at about 5.8x trailing revenues, compared to around 1.8x for Texas Roadhouse. Does this gap in the companies’ valuations make sense? We believe so. Chipotle has recorded higher revenue growth and a better growth in operating margin over the last three years. However, there is more to the comparison, which makes Chipotle and Texas Roadhouse similar bets at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Chipotle Mexican Grill vs Texas Roadhouse: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

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As both companies’ fiscal year ends in December, its ongoing FY is 2021. If compared on the basis of the past three years, Chipotle is better than Texas Roadhouse in revenue growth. Chipotle’s revenues have gained by a rate of 10.2% over the last three FY’s. On a comparable basis, Texas Roadhouse’s revenues rose by the rate of 3.3% over the last three FY’s. Further, for the most recent quarter (Q3 2021) Texas Roadhouse saw a better revenue growth with revenues rising by 37.7% YoY, while Chipotle’s rose by 21.9%.

2. Margins

Chipotle’s Operating margins were 10.6% in the last twelve month period, a positive 4.6% change compared to the last three FY’s. In comparison, Texas Roadhouse’s Operating margins were 7.9% in the last twelve month period, a positive 2.4% change compared to the last three FY’s. FCF margins for both companies are similar at 13.3% for Chipotle compared to 13.5% for Texas Roadhouse.

Risk

Chipotle has a better debt position, with debt as % of equity of 0% vs 17.8% for Texas Roadhouse. Chipotle has slightly more cash cushion, with cash as % of assets of 18.3% vs 17.9% for Texas Roadhouse.

The Net of It All

While Chipotle’s trailing revenue multiple stands higher than that of Texas Roadhouse, it has seen better growth in revenues and operating margins compared to Texas Roadhouse. A consistent rise in revenues and operating margin makes Chipotle more expensive and justifies a higher P/S ratio of 5.8x vs Texas Roadhouse’s 1.8x. We believe at current valuation both companies have similar expected returns over the next three year period and thus are comparable bets currently.

Also, Chipotle Peer Comparison summarizes how the company fares against peers on metrics that matter.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
CMG Return -15% -15% 292%
TXRH Return -7% -7% 72%
S&P 500 Return -2% -2% 108%
Trefis MS Portfolio Return -9% -9% 257%

[1] Month-to-date and year-to-date as of 1/19/2022
[2] Cumulative total returns since the end of 2016

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