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When Chipotle Mexican Grill (NYSE: CMG) reported earnings Tuesday, the numbers were mixed and the report generated some concern regarding the company’s underlying growth.
Let’s take a look at Chipotle earnings – both the quarterly and year-to-date data – and see if we can prognosticate what lies in the store for the stock.
I’m concerned that its status as a growth stock may be coming to an end, which means the stock may be overpriced.
The problem we see with restaurants, especially chains that engage in rapid expansion, is that earnings growth starts out in the high double-digits. But sooner or later, that earnings growth rate must slow down. The trick is to ride the stock up during its big growth phase and get out before the price tumbles as growth slows.
Here are the key figures from Chipotle earnings for the third quarter:
- Revenue was up 12.19% to $1.19 billion from a year earlier
- Comparable store sales up 2.6%
- Restaurant operating margins were 28.3%, down 50 basis points
- Net income was $145 million, up 10.79%
- EPS came in at $4.59, up 10.59%
Chipotle’s revenue is doing very well in the aggregate. A 12% increase is very impressive, especially since store count only increased 2.5%. However, at the end of the day, what really matters is same-store growth, and that 2.6% increase is pretty concerning.
You see, that kind of increase is what mature restaurants generate. It suggests – and that’s all it does – that people got a little less excited about the food this quarter, and newbies aren’t stampeding through the doors.
I also do not like that income and EPS increased at the 10.6% to 10.8% range. What happened to the days of 25% EPS growth? Are they coming to an end?
Chipotle Earnings in Broader View
Let’s check on Chipotle’s earnings for the year to date to see if this trend makes sense in a broader perspective. Here’s the data for the first nine months of the year:
- Revenue up 15.29% to $3.49 billion
- Comparable store sales up 5.5%
- Restaurant operating margin at 27.89%, up 50 basis points
- Net income of $408 million, up 26%
- EPS at $12.92, up 26%
This is pretty telling. Chipotle had far more robust numbers in the first half of the year, and Chipotle earnings figures for the third quarter are dragging everything down. I am particularly unhappy with the same-store numbers in the third quarter, even more so given how high they were earlier in the year.
The same applies to EPS and bottom-line income. Since year-to-date is 26% but Q3 came in at 11%, then the third quarter dragged down even stronger growth from earlier this year. So the big question is whether this is just an aberration or if it the beginning of a true slowdown. I am not encouraged that management guided us to low- to mid-single digit comps for FY16.
Unsustainable Growth?
Obviously, Chipotle is a great company that has executed extremely well. How many other chains could expand to 1,200 restaurants with no long-term debt? That means they expanded solely on the basis of IPO cash and cash flow. That’s amazing. So is the $1.2 billion they have in the bank.
However, if growth is slowing, then its price-earnings ratio of 41 is unsustainable. I am not a fan of buying into a stock with a P/E of 41 if bottom line growth is truly 10%. Hey, I might go with the flow if growth was 20% or more. Paying two times a growth rate for a growth stock is not unreasonable. But we have to see what happens next quarter, and if we see 11% growth again, then the stock could be headed lower.
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