Risks still remain
As noted above, Chipotle’s most recent quarterly results were not universally good news. Same store sales were weak and rising food costs cut margins, both of which had been forecast for months. These risks, combined with competition from an array of fast casual restaurants including Jack in the Box Inc. (NASDAQ:JACK)’s Qdoba and non-burrito alternatives such as Panera Bread Co (NASDAQ:PNRA) are worth monitoring. Additionally, the premium valuation placed on Chipotle Mexican Grill, Inc. (NYSE:CMG) makes the stock much more volatile; investors must have both a willingness to ride the stock’s roller coaster and also be comfortable with the current valuation.
A look at Chipotle’s valuation
With a TTM price to earnings ratio approaching 40, many investors may still be reluctant to purchase shares. While the volatility discussed above makes it difficult to time purchases of Chipotle perfectly, the current valuation is right in the middle of the historical range as illustrated by the following chart:
CMG PE Ratio TTM data by YCharts
In addition to being within the historical range for Chipotle’s valuation, the company is trading at valuation multiples that are comparable to other best-in-class specialty eateries like Panera and Starbucks Corporation (NASDAQ:SBUX). Panera and Starbucks are both trading at a slightly more attractive valuation at today’s prices, but given Chipotle Mexican Grill, Inc. (NYSE:CMG)’s history of volatility it is quite likely that there will be another opportunity to buy shares at a trailing P/E of 30 or less at some point.
Meanwhile, the fact that all three companies have been successful is a strong affirmation that the market for food that is a step above the fast food offerings of Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD) continues to strengthen as more people focus on eating foods with higher quality ingredients. The gap in share price performance between Chipotle, Panera Bread Co (NASDAQ:PNRA), and Starbucks Corporation (NASDAQ:SBUX) and their fast food competition reflects this reality:
CMG Total Return Price data by YCharts
Is Chipotle a buy?
There have been no new developments that would lead to a change in the long term conclusion that Chipotle is a Top 10 stock. Is it a screaming buy today? Not quite, especially given the relative softness of same store sales in recent periods compared to Chipotle Mexican Grill, Inc. (NYSE:CMG)’s history of double digit increases. Despite this yellow flag and ongoing consideration of the company’s valuation, a strong case can be made that the company can continue to outperform the market over the long term given the company’s growth opportunities, excellent management, and fantastic products. For these reasons, Chipotle remains a compelling stock for consideration as a long-term investment.
The article Is Now the Time to Take a Bite Out of This Restaurant Stock? originally appeared on Fool.com and is written by Brian Shaw.
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