For this analysis, we have considered the forward PE (price-to-earnings) multiple due to high visibility in Chipotle Mexican Grill’s (CMG) earnings. The forward PE multiple is calculated by dividing Chipotle’s stock price by analysts’ earnings estimates for the next four quarters.
Chipotle’s PE multiple
Although Chipotle’s 1Q17 earnings were better than expected, its forward PE multiple has fallen. As of June 7, 2017, Chipotle was trading at 46.0x compared to 50.7x before the announcement of its 1Q17 earnings. The decline in casual restaurants sales due to the improvement in the quality of food being served at fast food restaurants, the widening gap between eating at home and the cost of dining out, and the increase in cook-it-yourself meal kits sales have made investors skeptical about Chipotle’s future earnings. These factors led to a fall in Chipotle’s stock price and its PE multiple. On the same day, Panera Bread (PNRA) and Shake Shack (SHAK) were trading at PE multiples of 38.1x and 69.8x, respectively.
Chipotle has been focusing on menu innovations, improving the quality of its menu items, and the enhancement of the customer experience at its restaurants through the implementation of digital advancements to drive its sales. The implementation of smart pick-up times and the removal of artificial ingredients are expected to increase Chipotle’s expenditures. If these initiatives fail to generate expected sales, the increased expenses could put pressure on the company’s margins, thus lowering its earnings.
For the next four quarters, analysts are expecting Chipotle to post EPS growth of 143.7%, which might have been factored into Chipotle’s current stock price. If the company’s earnings come out lower than analysts’ estimates, the selling pressure could bring the company’s stock price and its PE multiple down.
You can mitigate these company-specific risks by investing in the iShares US Consumer Services ETF (IYC), which has invested 10.8% of its holdings in restaurant and travel companies.
Next, we’ll look at analysts’ recommendations and target prices.