Due to high visibility in Chipotle Mexican Grill’s (CMG) earnings, we have considered the forward price-to-earnings (or PE) multiple for our analysis. The forward PE multiple is calculated by dividing Chipotle’s stock price from analysts’ estimated EPS (earnings per share) for the next four quarters.
Chipotle’s forward PE multiple
The announcement of a rise in its marketing and promotional expenses in 2Q17 by Chipotle’s management and increasing competition from fast-food restaurants have made investors skeptical of the company’s earnings. This led to a fall in its stock price and valuation multiple.
On July 13, 2017, Chipotle’s forward PE multiple was 39.1x compared to 50.7x before the announcement of its 1Q17 earnings. On the same day, its peers Panera Bread (PNRA) and Shake Shack (SHAK) were trading at forward PE multiples of 37.5x and 63.9x, respectively.
As a young company, Shake Shack has huge potential to expand. The growth prospects are valued highly by the market, which led Shake Shack to trade at a higher multiple.
To drive its same-store sales growth, Chipotle has been focusing on implementation of digital advancements, improving the quality of menu items, menu innovations, and implementation of new services such as delivery.
The company has increased its marketing and promotional expenses to increase traffic at its restaurants. All these initiatives are expected to increase Chipotle’s expenditures. If these initiatives fail to generate the expected sales, the increased expenses could put pressure on the company’s margins and lower its earnings.
For the next four quarters, analysts expect Chipotle to post EPS growth of 135.5%, which has been factored into the company’s current stock price. If Chipotle posts earnings lower than analysts’ estimates, the selling pressure could lower the company’s stock price and its valuation multiple.
You can mitigate these company-specific risks by investing in the iShares Select Dividend ETF (DVY), which invests 37.6% of its holdings in restaurants and travel companies.
Next, we’ll look at analysts’ recommendations ahead of its 2Q17 earnings.