Chipotle Mexican Grill: Expect Some Correction On Results

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Apr 22, 2015
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Chipotle Mexican Grill (CMG, Financial), which operates fast-casual and fresh Mexican food restaurants, reported its 1Q15 results yesterday after market hours. While the company delivered a strong set of numbers, the results were still below expectations and I believe that the stock is likely to correct in the near-term. This article discusses the results and my view that the coming correction will be a good opportunity to consider some exposure to the stock.

For 1Q15, the company’s revenue increased by 20.4% to $1.09 billion with the diluted earnings per share being at $3.88, representing an increase of 47%. While revenue increase was robust, it is important to mention here that the company’s 4Q14 revenue and EPS increase was 26.7% and 51.8% respectively. Therefore, growth has moderated and I believe that the markets will discount this factor.

Another important parameter that needs mentioning is the comparable store sales growth. For 1Q15, the comparable store sales growth was 10.4% as compared to 16.1% in 4Q14 and 16.8% in FY14. Therefore, comparable store sales growth has also moderated and the growth in 1Q15 has been driven by an increase in menu price than an increase in traffic. In my view, comparable store sales growth driven by the latter would have been more desirable.

For 2015, Chipotle Mexican Grill has an ambitious plan to open 190-205 new restaurants. However, the company expects comparable store sales at low-to-mid single digit. Therefore, overall revenue growth that will increase through new store openings will be offset to some extent by very moderate comparable store sales growth.

For FY15, analyst estimates suggest earnings growth of 21% for Chipotle Mexican Grill and I believe that the moderation in earnings growth will be the single biggest factor for the stock moving lower in the coming days. For FY14, earnings growth was 35% and that had triggered strong upside for the stock.

I must however mention that an estimated earnings growth of 21% for FY15 and 19% for FY16 is healthy. I therefore believe that investors can consider exposure to the stock on any 5% to 10% correction in the coming weeks. It is important to note that the company has been improving on its operating margin with restaurant level operating margin of 27.5% in 1Q15, representing an increase of 160 basis points as compared to 1Q14.

The point is that healthy earnings growth will continue along with strong margin, but I don’t expect Chipotle to clock 30% to 40% earnings growth again as it had done in the past. 15% to 20% earnings is the likely trend for the coming years and valuations will adjust accordingly.

In conclusion, Chipotle Mexican Grill remains an attractive investment for the next 2-3 years. However, investors need to tone down on their expectations in terms of EPS growth. In my view, the stock can still be retained in the portfolio after a likely correction in the coming weeks.