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Should You Keep Avoiding Chipotle (CMG) After Strong Earnings?

Back in July I answered the question – Should You Avoid Chipotle?  This, so you can keep your retirement portfolio safe.

Today, I answer the question – Should You Keep Avoiding Chipotle After Strong Earnings? You can read the original article in full at the link above.

But if you don’t want to; here’s a quick recap of the last Chipotle article….

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 it’s 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.

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.


This thesis to avoid Chipotle continued playing out since July… Sort of.

Its stock is up from $1,121 per share when I last wrote about it to $1,209.11 today.

This is an increase of 7.9% since July.

The increase was largely driven by both the lockdowns mostly ending.  And because the stellar earnings it reported on October 21st, 2020.

  • Revenue was up 14.1% in the year to year quarterly period to $1.6 billion.
  • Digital sales grew 202.5%.
  • And cash levels rose.

This is what the media reported on and is why Chipotle shares rose after its earnings release… But it wasn’t the full story either.

Costs rises associated with closures and cleaning procedures caused profit margins to fall.

And the even bigger problem is that it’s still overvalued.

As of this writing its P/E is 142.2.

Its P/CF is 45.9.

Its forward P/E is 55.9.

And its enterprise value to operating income – EV/EBIT is 117.9.

On all three metrics at the top I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show Chipotle is still massively overvalued.  And this makes it an enormously risky investment.

For this reason, continue avoiding its stock. 

Plus, I’ve already found better potential investments for you…

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

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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