Continuation from yesterday…...In other words, over the last eight years the company has been able to grow its new restaurant base at an annual rate of 27.5%. More importantly, Chipotle can continue to grow its restaurant base at the same pace for the foreseeable future. By comparison, other fast food giants such as McDonalds and Subway have 35,000 and 33,000 worldwide restaurants respectively. Suggesting that if Chipotle continues to perform as it has done over the last decade it might, in theory, continue to grow at the same rate for at least another 10 years. This was certainly the case back in 2006 when the company had only 500 stores.
Further, Chipotle’s restaurant-level operating margins are among the best in the industry at 26.25%. Suggesting that the company can continue on with their aggressive growth plans for the foreseeable future and without any additional outside capital. Finally, the company has a number of new concepts in development. They include ShopHouse Southeast Asian Kitchen with 6 restaurants and Pizzeria Locale with only one location. In short, investors in the company anticipate that Chipotle’s management will be able to convert these new growth seeds into successful concepts that can grow at least as fast as Chipotle itself.
When we put these factors together, in addition to great tasting food, we begin to understand why Chipotle was, and still is, selling at such a high multiple. Simply put, investors in the company anticipate Chipotle to continue on with its impressive 25-30% growth trajectory for the foreseeable future and without any need for additional capital.
Whether or not such thinking justifies Chipotle’s speculative valuation levels is an entirely different matter. Coming from a strong value oriented background my initial reaction would be NO. That would certainly be the case in 2006 or right after the IPO.
Based on my own trading experience it is wise to avoid trading in IPO’s right after they become available. It typically takes any given stock at least a few years to settle within its trading pattern. Until that happens it is next to impossible to determine if the stock will decline or surge higher. That is further complicated by the fact that most companies go public at the highest price possible, leaving very little upside for new investors.
Point being, despite Chipotle’s fundamental strength and its future growth opportunity it would not have been a wise investment decision to invest in the company right after its IPO. Not only because the company’s stock price doubled right at the open, putting its valuation out of reach, but also because it is smart to allow newly public companies to first set their trading patterns. And while this would render our 2006 entry point obsolete, the market presented us with even a better opportunity in late 2008 and early 2009 when Chipotle’s stock price reached a low point of $39 a share. A 75% decline from its 2007 top.
Despite this massive drop in its share price due to a 2008 financial crisis, Chipotle’s fundamental picture remained intact. In fact, in 2008 alone the company increased its revenue by 22.7%, grew its sales to $1.3 Billion, opened 136 new restaurants, repurchased $100 million is stocks and maintained its operating margins at 21.5%.
In short, the overall business was performing incredibly well, yet the company was selling at a valuation level that was, for the first time, reasonable. With a market cap of $1.2 Billion, a P/E ratio of 16.52, a P/S ratio of 0.92 and a P/B ratio of 1.9, the valuation of Chipotle was sensible. Particularly when you take the future growth rate and opportunity into consideration. Making an investment in Chipotle at this point in time and from the fundamental perspective alone…… a no brainer. Let’s us now see if the technical analysis at the time would have confirmed our fundamental decision.
To Be Continued On Monday……
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