Chipotle (CMG) reported third-quarter revenue and earnings Thursday, following the strong performance of best-idea Buffalo Wild Wings (BWLD) yesterday. Whereas we think Buffalo Wild Wings is an excellent growth and valuation play, we think Chipotle’s stock price has gotten way ahead of its fundamentals. Though our put option contract on Chipotle that we hold in our best ideas portfolio may expire worthless, or not, in January (it’s a $300 strike), we maintain the firm remains significantly overvalued at 37 times next year’s earnings, and we are waiting patiently. We are sticking with our $213 fair value estimate (~$275 per share on the high end) on Chipotle and expect the company’s price to converge to our fair value over time.
Chipotle’s revenue increased 24.1% on the heels of 11.3% same-store-sales expansion, which was bolstered by higher traffic and menu price hikes (a 4.5% increase at 80% of stores). Restaurant level operating margins fell 100 basis points, as commodity costs (chicken, beef, cheese, etc.) ate into profitability. However, net income and diluted earnings per share ($1.90) jumped about 25% each (and beat Street expectations by $0.05 per share). The burrito-maker opened 32 new restaurants in the quarter, including its new ShopHouse Southeast Asian Kitchen, which we believe will come nowhere close to being as successful as the core Chipotle brand.
We were less than impressed with management’s same-store-sales guidance for 2012, which is estimated to grow at a low-single-digit pace. In 2011, Chipotle will grow same-store-sales by a low-double-digit pace, so this is a meaningful slowdown. We think the firm will likely see commodity cost pressures ease, but the slowing top-line will be an impediment due to negative operating leverage that will occur. The company plans to open as many as 165 restaurants in 2012, a breakneck pace. Given the same-store-sales slowdown, the rapid restaurant growth, and the rollout of ShopHouse, we think management has a lot on its hands. We’re expecting a significant pullback in the shares and find little justification for its astronomical 37 forward P/E multiple.