Morningstar | Valuation Appears Lofty, but Chipotle Comeback Story Likely to Continue for Some Time
Narrow-moat Chipotle continues to put together one of the industry's more impressive comeback stories, with first-quarter comps of 9.9% (including impressive 5.8% transaction growth as well as 2.5% pricing and almost 2% mix) and 150 basis points in restaurant margins to 21%. More important, this comeback shows few signs of letting up anytime soon, as we believe higher-ROI marketing, digital orders (both mobile and delivery, which increased 101% year over year and represented 15.7% of total sales), and the expanded rollout of its loyalty program and the "Chipotlane" mobile order/pickup lane suggest that Chipotle can meet its updated 2019 comp growth target in the high single digits but also carry this trajectory into 2020 and beyond (with new product innovation offering even greater upside). Assuming the company delivers high-single-digit comps the next two years, it will put average unit volumes around $2.3 million by the end of 2020 and restaurant margins in the 22% range. While general and administrative costs are a bit of a wildcard due to performance-based stock compensation and other transformation costs, first-quarter results give us more confidence in our longer-term operating margin forecast in the midsingle digits.We plan to raise our $500 fair value estimate by 10% for the strong start to 2019, and we increased our near-term revenue and operating margin estimates. Over the next five years, we now anticipate low-double-digit revenue growth, with restaurant margins and operating margins recovering to the low- to mid-20s and the mid-teens, respectively. While we have a tough time justifying the current market price north of 40 times next year's market EPS outlook--especially with competition continuing to evolve and remaining highly promotional--and would wait for a more attractive entry point, we acknowledge that the comp drivers and the possibility of accelerating unit growth will likely keep this stock at lofty levels for the foreseeable future.
Chipotle Mexican Grill together with its subsidiaries operates Chipotle Mexican Grill restaurants, which feature a menu of burritos, burrito bowls (a burrito without the tortilla), tacos, and salads. The company operates Chipotle restaurants throughout the United States, international Chipotle restaurants, and non-Chipotle restaurants. The company uses various herbs, spices and seasonings to prepare its meats and vegetables. The company also serves tortilla chips that seasoned with lime juice and salt, with sides of hand mashed guacamole, salsas, or queso. In addition to sodas, fruit and tea drinks, and organic milk, most of the company's restaurants also provide a selection of beer and margaritas.
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