Chipotle: Impressive Momentum But Valuation Is Too Aggressive

Chipotle Mexican Grill (CMG) is on fire lately, shares of the fast-casual Mexican food chain are up by almost 70% year to date on the back of strong revenue growth and increasing profit margins. Management is leading the company in the right direction, and vigorous momentum could provide a powerful upside fuel for the stock in the short term.

On the other hand, past performance does not guarantee future returns and Chipotle's stock looks too expensive at current prices.

Outstanding Momentum

Chipotle is delivering rapid revenue growth and increasing profit margins, this means that earnings are getting a double boost from solid revenue growth in combination with a larger share of revenue being retained as profits. The company is also making a lot of progress in its digital transformation, which is a crucial success driver in the industry nowadays.

Some highlights from Chipotle's financial reports for the fourth quarter of 2019:

  • Revenue increased by 13.9% to $1.3 billion.
  • Comparable restaurant sales increased by 9.9%.
  • Digital sales grew 100.7%, accounting for 15.7% of sales for the quarter.
  • Restaurant level operating margin was 21%, increasing from 19.5% in the same quarter last year.
  • Adjusted diluted earnings per share reached $3.40, a 59.6% increase versus the same quarter last year.
  • For the full year 2019, management is expecting mid to high single-digit comparable restaurant sales growth and 140 to 155 new restaurant openings.

It's not just that the company is doing well and producing solid growth rates, Chipotle is also doing better than expected by Wall Street, and this has a major impact on returns.

Current stock prices reflect certain expectations for a company. If the numbers come in above expectations, then the stock tends to move higher in order to reflect enlarged earnings expectations going forward. Chipotle has announced earnings numbers ahead of expectations in every quarter since the fourth quarter of 2017.

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Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in ...

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