Yahoo Finance Is Chipotle’s Current Valuation Rich?
Is Post-1Q the Right Time to Place Your Order for Chipotle?
Chipotle’s valuation
In the previous part of this series, we looked at Chipotle Mexican Grill’s (CMG) same-store sales growth. This growth potential is one of the key drivers of Chipotle’s valuation. Chipotle has historically been a high-growth stock, overshadowing some of its closest peers in the industry.
The above chart shows how valuation has changed over time for Chipotle and its peers. Chipotle currently trades at a forward price-to-earnings (or PE) ratio of 34x, which is higher than the average of 28.5x for its peers .
Domino’s Pizza (DPZ), Papa John’s (PZZA), and Starbucks (SBUX) have above-average valuations of 31x, 30x, and 29x, respectively. Qdoba’s parent, Jack in the Box (JACK), is trading at 28x. This is higher than a PE of 18x for the S&P 500 index and 20x for the consumer discretionary sector ETF (XLY).
Does Chipotle’s stock have an upside?
Usually when a valuation is higher than its comparable peers, the company is said to be overvalued. But is it true that Chipotle is overvalued? Historically, Chipotle’s forward PE has gone as high as 50x its forward earnings expectations. Chipotle attributes its higher valuation to its growth potential, food culture, and good management.
On average, Chipotle has traded at 36x its forward earnings. Currently, it’s trading at 34x, which is below its average. With an average forward PE of 36x, the stock can go back to $670. Currently, Chipotle is trading at $636, so this may be an opportunity for investors who still believe in Chipotle’s high-growth story.
Bear in mind that after the company reported its earnings in April, its valuation dropped 5% because management maintained its low-to-mid-single-digit comps growth outlook. But the company gave this outlook in the fourth quarter of 2014, so the information was not really new.
Chipotle’s success compared to its peers lies in average revenue per square foot. This is a key metric investors can use to see whether the company’s same-store sales growth has room to grow when compared to its peers. We’ll look at this more in the next part.
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