I’ll take a shot at this as well. Not sure that I can answer any better than Bob, but maybe a bit simpler. You are correct, on a PE basis, this stock is crazily valued, but the stock market is usually not that simple. In fact, the earnings this year are only a dollar and change, a full 300-400 PE. Surely it must be overvalued, right?..
Well, if you look a little deeper, you will see this is a company that has zero debt. They continue to open new stores with just the cash flow from operations. They also are buying back stock in significant quantities. Each store that they open, is fully paid off in a few years, (used to be 18 months when times were better) which means the earnings from those stores can then be used to open more stores, again without borrowing any money. Furthermore, there is very little risk in opening up a new store. They don’t need to invent a new product or create new demand. They just need to fill out the country with stores so that people who know Chipotle and want Chipotle, can find a close store to get their fill…
Now, I know I haven’t talked valuation yet, and I haven’t talked about whether the company’s problems will continue to follow them, but clearly there is potential value here. The question is how do you value a company like this? To do it on a straight PE ratio is clearly faulty. To ignore the problems is clearly faulty as well… hence the volatile nature of the stock.
But lets, just make a couple assumptions that over the next 3 years:
1- They fix the issues.
2- Their public perception of a quality food at a reasonable price returns and so does their margins (or close to their previous margins).
3- They continue to expand their store count and buy back stock until and if it starts to rise again.
These don’t seem like crazy assumptions, in fact, other than the margins question, I would say they are very likely. If so, you will have a company that will be making probably $17-$20 a share…Now assuming that’s true, what do you think the share price will be. You could say it will have a 20x multiple and that would put it at $400, the same price it is today. But that is not really thinking too closely about it.
If, and I say if, they make say $17 a share in 3 years. That means they will have a earnings path of something like $9, $13, and $17… now you tell me, what would you pay for that?..
I would guess it would be back to close to new highs… and it would be a market darling again…
So do I think it is a slam dunk? Heck no. But I am hanging on. I think that the quarterly comparisons are going to start to look good and it wont be hard to start showing 20+ % growth again. They have a long way to go, but I am not sure we haven’t seen the lows now.
Just my opinion, and I recognize that this is not a Saul type opinion… I am okay with that
Long CMG, but not one of my largest holdings…