On Dec. 15, Gregg Engles, a director of Chipotle Mexican Grill Inc. (CMG, Financial), reported buying 877 shares at around $2,280 per share, with a total value of about $2 million. In contrast, Chief Operating Officer Scott Boatwright sold 1,300 shares for $3 million. Should investors follow Engles or Boatwright's moves? Let's take a closer look.
Chipotle sales, profits rebound post-2015 crisis
The company owns and operates 3,129 Chipotle outlets across the U.S., 53 locations in other countries and five non-Chipotle restaurants. Its main food offerings include burritos, burrito bowls, quesadillas, tacos and salads.
Chipotle has demonstrated a rising trend in its revenue, achieving growth in nine out of the past 10 years. The exception was in 2016, when the company faced a decline in sales of 13.3%, dropping from $4.5 billion in 2015 to $3.9 billion, primarily due to incidents related to food-borne illnesses. This decline was also reflected in a 20.4% drop in comparable sales. However, over the last decade, Chipotle's revenue has increased from $3.2 billion in 2013 to $8.63 billion in 2022, resulting in a compounded annual growth rate of 10.43%.
A critical metric for assessing growth in the restaurant industry is comparable restaurant sales, which indicate organic growth from outlets that have been operational for at least a year. Many restaurant chains generate sales growth from two sources: the opening of new restaurants or sales increases in existing restaurants. I favor the latter as it represents organic and sustainable growth. Over the past five years, Chipotle has consistently demonstrated growth in comparable restaurant sales. Remarkably, even during the Covid-19 pandemic, the company saw an increase of 1.8% in its comparable restaurant sales. Subsequently, the comparable restaurant sales growth came in at 19.3% and 8% in 2021 and 2022, respectively.
Along with the growing sales is the operating income growth. Although its operating income fluctuated widely, especially during the time of the food-borne illness incident, its operating income bounced back strongly afterward. The operating income was $539.5 million in 2013, dropping to $58.4 million in 2016 before growing to $1.18 billion in 2022. During the same period, its operating cash flow increased from $529 million to $1.92 billion, while the free cash flow also followed the same path, growing from $223 million to $844 million.
Strong growth in the third quarter
In the third quarter, Chipotle sustained its growth momentum with robust rise in sales and earnings. The company's sales surged by over 11%, reaching $2.5 billion, buoyed by a 5% increase in comparable restaurant sales. This growth was complemented by an improvement in the restaurant-level margin, which rose by 100 basis points to 26.3%. Additionally, there was a notable 19% increase in adjusted diluted earnings per share, climbing to $11.36.
Looking forward, Chipotle is setting its sights on expansion, with plans to open approximately 285 to 315 new restaurants by 2024. This strategic move indicates the company's confidence in its growth trajectory and commitment to broadening its market presence.
Debt-free operation
Chipotle maintains a balance sheet free of debt despite the extensive operations of its restaurants. The company's liabilities are primarily confined to operating lease obligations, which amount to nearly $3.16 billion. Looking ahead to the 2023 to 2027 period, the average annual payments for these lease liabilities are projected to be between $383 million and $404 million. Given that Chipotle's operating cash flow exceeded $1 billion in 2022, the company can comfortably manage these lease payments.
Currently overvalued
Compared to its competitors, including Restaurant Brands International (QSR, Financial) and Yum Brands (YUM, Financial), Chipotle stands out with the most premium valuation. Chipotle's enterprise value/Ebitda ratio is the highest at 35.2, significantly surpassing the Ebitda multiples of Yum Brands and Restaurant Brands International. Yum Brands' valuation is measured at 19.3 times Ebitda, whereas Restaurant Brands International has the lowest valuation at nearly 18.7 times.
When considering the historical five-year average Ebitda multiple, Chipotle's valuation of nearly 39 remains substantially higher than Restaurant Brands International and Yum Brands. The five-year average enterprise value/Ebitda rati for Restaurant Brands International is only 15.80, while Yum Brands' five-year average is 20.20.
By 2024, Chipotle is projected to generate approximately $11 billion in revenue. Its 10-year average Ebitda margin at 14% translates to an expected Ebitda of around $1.54 billion. If we apply Chipotle's five-year average Ebitda multiple of 39 to this figure, the calculated enterprise value for the company would be about $60 billion. This estimated valuation is nearly 9% lower than its current market valuation, indicating that Chipotle is overvalued at the moment.
Conclusion
While Chipotle Mexican Grill showcases a promising profile with its increasing revenue, strong cash flow and robust balance sheet, the current valuation suggests it is overvalued. Given this scenario, it would be prudent for investors to monitor the company. A strategic approach would be to wait for a market correction before initiating a long position, thereby capitalizing on the company's solid fundamentals while also ensuring a more favorable entry point in terms of valuation.
