Re-visiting Chipotle Mexican Grill, Inc.

I have previously written about Chipotle Mexican Grill, Inc. on 6 Feb 2016 (read here).

There are many things I like about the company:

• Its good balance sheet (Chipotle has an immaculate balance sheet with no debt and $190 million in cash);
• Strong growth for many years (increasing ROE, ROIC, ROA and free cash flow);
• The management aggressive share buy backs in 2015 and 2016.

 

The company has also announced plans to open a burger restaurant called “Tasty Made” this year which will exclusively focus on burgers, fresh cut French fries and milkshakes.

• Chipotle Has Bought Back 2 Million Shares in 2016. Should Investors Be Happy? (read here)
• Has Chipotle Mexican Grill Lost Its Appetite for Buybacks? (read here)
• Can “Tasty Made” Become The Turnaround Trigger For Chipotle Mexican Grill? (read here)

Yes, the recent food scare in 2015 which caused its stock price to drop seem like a good opportunity to pick up some of these stocks. E. coli outbreak and other incidents sent sales plummeting starting at the end of October 2015.

On 6 Feb 2016, when I did the post on Chipotle Mexican Grill, Inc., the stock was trading at around USD 480. On 12 August 2016, the price was at USD 397.33, even lower. If I was interested in the stock then (in Feb 2016), I probably would be more interested in it now. Moreover, earnings have started to recover- coming off the worst two-quarters in company history (read here).

However, what is perhaps more important are the things I don’t like:

• Its growth has faltered even before the food scare.
• Although it has swung back to profitability in the second quarter, but the earnings weren’t spectacular. Chipotle’s same-store sales declined 26.5 percent. Transactions fell 19 percent during the quarter, suggesting that much of the sales gains were due to the strong promotions. Chipotle also saw its food costs as a percentage of sales rise 110 basis points to 34.2 percent. (read here)
• I have not tried their food before, and am not aware of their service standard.
• It has no dividend payout. Which means that there is nothing to hold on to, if stock prices crash drastically.
• And yes, the US market (S&P 500) is at historical high. The average P/E ratio of S&P 500 since the 1870’s has been about 16.7 (read here). Today, the P/E (TTM) of S&P 500 is at 20.5 (read here). Not exceedingly high, but nevertheless higher than the average. I would have preferred a perfect storm when the market crashes causing the stock to plummet further. This would provide a bigger margin of safety.

 

I am like a vulture circling a wounded prey, waiting and waiting. And oh yes, in the meantime, still trying to build up my war chest.

Nevertheless, let’s do a quick trailing PEG and intrinsic value calculation of the stock.

1) Trailing PEG

P/E: 58.88
Dividend Yield (%): N.A.
EPS compound growth rate (5 yrs): 21.77%
The trailing PEG will be 58.88/21.77 = 2.7. Which is not good (> 1).

2) Intrinsic Value

Looking at the above, the stock price on 12 August 2016 at USD 397.33 is much lower than the calculated intrinsic value (USD 1,010). In fact, it is approximately 61% lower than the calculated intrinsic value.

Interestingly, the intrinsic value I calculated on 6 Feb 2016 was USD 718 (read here).

However, the intrinsic value (USD 1,010) as shown in the table above is excluding the exceptional bad year results of 2015.

Let’s do the calculation again, but this time using the TTM (Trailing 12 months) results for this year (assuming that is the final results for 2016 – although highly unlikely). Please see below.

Looking at the above, the calculated intrinsic value is now USD 331.35 which is much closer to the stock price on 12 Aug 2016 (USD 397.33). Unfortunately, the intrinsic value is lower than the stock price. Hence, there is no margin of safety.

Nevertheless, I do hope that the stock price will drop further and present a bigger margin of safety should I decide to dip into it.
In the meantime, I will be checking their earnings periodically and observe if the recovery is consistent (or better) which might signal growth in the future.