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Should You Buy Chipotle?

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Who would have thought a fast/casual Mexican food IPO on the market in January 2006 would have made you and 5,000% return since then…

But it has.

Chipotle Mexican Grill was founded in 1993 in Denver Colorado by Steve Ellis.

And it creates and serves higher quality fast/casual Mexican food like tacos, burritos, taco bowls, salads, etc.

From its original founding the company grew rapidly… IPO’d on the market on January 26th, 2006 at a price of at a price of $22 per share.

And it now does more than $5.6 million in sales annually via its more than 2,600 restaurants in the United States, Canada, United Kingdom, France, and Germany.

Because of this massive growth, of this writing its shares are now worth $1,121.03.

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This is an increase from its original IPO price of 50X or 5,000% in 14 years.

All from selling higher quality – or even perceived higher quality – food than other fast casual restaurants like Qdoba.

But this is all in the past and doesn’t help you answer the question you’re wondering now…

Should you buy Chipotle stock today and hope to earn enormous profits owning its shares into the future?

We’ll begin figuring this out by looking at its profitability and cash flow.

Is Chipotle Profitable?

Let’s do a quick rundown of Chipotle’s profitability and cash flow. Because profits and cash flow drive the long-term value and pricing and value of a stock over time.

I measure this in part by looking at two important metrics.

Operating profits and free cash flow/sales (FCF/Sales).

On an operating profit basis Chipotle’s produced an average operating profit margin of 12.3% per year every year over the last 10 years.

I look for any company to produce above 10% margins on a consistent basis to consider as an investment. This is good.

But its also not the full story…

In 2016 Chipotle’s operating margin began cratering… The 4 full years from 2016 to the end of 2019 its operating margin averaged 5.7% per year.

This is a 53.7% fall in its operating margin in the last 4 years compared to the entire decade.

Not good.

But why did this happen?

Because of increased competition and higher costs relating to opening more stores. And due to higher costs related to the enhanced safety procedures after the huge E. Coli outbreak at Chipotle in 2015.

What about its FCF/Sales?

Over the last 10 years Chipotle’s FCF/Sales is 8.1% on average every year.

This is fantastic… But again, it’s not the full story.

Much like its operating profit margin, the FCF/Sales margin cratered from 2016 to the end of 2019 for the same reasons mentioned above… All the way to 5.4%

I look for companies to produce FCF/Sales at higher than 5% on a consistent basis. Chipotle still beats surpasses this threshold even when considering its fall over the last 4 full years.

Both operating profit and free cash flow are important because they help show you the true profitability of the company.

The more profitable a company is, the higher its value goes over time. And the more money it can spend on innovations and serving customers.

I estimate that far fewer than 5% of all public companies on Earth surpass my minimum thresholds for the 2 metrics above on a consistent basis… And Chipotle meets one of these criteria.

But what about its valuation?

Is Chipotle Undervalued?

As a conservative investor I want to recommend solid, safe, and relatively low risk investments to you.

Often those are achieved by high profit margins and low debt. But it’s also necessary to look at valuation too.

Because if you buy overvalued assets there is a lower margin of safety. And doing this makes the investment riskier.

I want to buy assets that are undervalued in a best-case scenario. And at worst fairly valued.

And Chipotle does not come even close to being undervalued…

• Its current P/E is 99.2.

• Its current P/CF is 46.6.

• And its forward P/E is 109.9.

I look for companies to sell at ratios below 20 on these metrics to consider the investment undervalued.

These metrics show that Chipotle is massively overvalued right now.

Because of this, I recommend you stay far away from its stock right now.

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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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