Chipotle’s Valuation Multiple Compared to Its Peers
Due to the greater visibility of Chipotle Mexican Grill’s (CMG) earnings, we’ve opted for a forward PE (price-to-earnings) multiple for our analysis. Forward PE is calculated by dividing Chipotle’s stock price from analysts’ earnings estimates for the next four quarters.
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Chipotle’s forward PE multiple
As of October 11, 2017, Chipotle was trading at a forward PE multiple of 31.3x compared to 34.8x before its 2Q17 earnings announcement. The new food safety issue in July 2017, its lower-than-expected 2Q17 SSSG (same-store sales growth), and the downgrading of its stock by many analysts led to a fall in CMG stock as well as its valuation multiple.
On the same day, Chipotle’s peers Shake Shack (SHAK) and The Cheesecake Factory (CAKE) were trading at forward PE multiples of 57.8x and 14.9x, respectively. SHAK is still in the growth phase of its business life cycle and has room to expand, which has allowed the company to trade at a higher forward PE multiple than its peers.
Chipotle is focusing on menu innovations, implementation of technological advancements, and marketing and promotional initiatives to drive its SSSG. It has opened its NEXT Kitchen in New York City to develop innovative menu items. All these initiatives have raised the company’s expenditures. If the measures fail to generate expected sales, the rise in expenses could put pressure on the company’s margins, thus lowering its earnings.
For the next four quarters, analysts are expecting Chipotle’s EPS (earnings per share) to rise 68.1%, which could have already been factored into the company’s current stock price. If the company fails to generate expected EPS, selling pressure could bring down CMG stock as well as its valuation multiple.
Next, we’ll look at analysts’ recommendations.