Does ShopHouse Justify Chipotle Mexican Grill, Inc. (CMG)’s Valuation?

The expansion isn’t a slam-dunk…

Even though we like the idea, we do not believe the concept justifies Chipotle Mexican Grill, Inc. (NYSE:CMG)’s premium valuation. For one, the restaurant is still in its very early stages. The potential for blockbuster success is there, but fast-food is a crowded, uber-competitive space. And it’s certainly feasible that ShopHouse’s market potential could be significantly smaller than Chipotle’s market potential.

Additionally, we think Chipotle Mexican Grill, Inc. (NYSE:CMG) is fostering a competitor with its ShopHouse concept. Both restaurants will be fighting for middle-class lunch and dinner dollars in the same price-range, with a similar experience. We doubt it will be a zero-sum game, but we think ShopHouse could eat into the core Chipotle business, to a certain degree.

Finally, the logistics of running two separate fast-food restaurants is difficult. Just a few years ago, Chipotle was owned by McDonald’s Corporation (NYSE:MCD), which has also owned Boston Market, Aroma Café, Donatos Pizza, and a stake in Pret-A-Manger. McDonald’s Corporation (NYSE:MCD) divested all of these properties over the years, and it seems that focusing on different concepts can distract from the core business. Of course, Yum! has largely been able to avoid this issue, but it has rid itself of non-core assets in the past few years as well. Further, McDonald’s Corporation (NYSE:MCD) same-store sales growth has been largely disappointing over the past year. Still, the very last thing Chipotle Mexican Grill, Inc. (NYSE:CMG)’s management team should do is divert too much attention from its cash cow.

Valuentum’s Take

Although Valuentum likes the ShopHouse concept, it carries several operational risks without the necessary benefit to justify Chipotle’s current valuation. In Valuentum’s view, Chipotle makes a wonderful product, and we assume ShopHouse’s take on Asian is comparably good.

Nevertheless, Valuentum can’t help but think the firm’s current valuation looks out-of-whack with fundamentals. Growth is clearly slowing, and the days of 20%+ revenue expansion appear to be over. We are exploring opening a bearish position on Chipotle Mexican Grill, Inc. (NYSE:CMG) in the portfolio of our Best Ideas Newsletter. For Motley Fool’s take on Chipotle, take our Special Report below.

The article Does ShopHouse Justify Chipotle’s Valuation? originally appeared on Fool.com.

RJ is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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