We opted for the forward PE (price-to-earnings) multiple due to the high visibility in Chipotle Mexican Grill’s (CMG) earnings. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimate for the next four quarters.
Chipotle’s forward PE multiple
The lower-than-expected 3Q17 earnings, lowering of 2017 SSSG guidance, and trimming of new restaurant opening guidance could have led to a fall in Chipotle’s stock price and its valuation multiple. As of October 26, Chipotle was trading at a forward PE multiple of 31.34x, compared to 33.47x before the announcement of 3Q17 earnings. On the same day, its peers Shake Shack (SHAK) and The Cheesecake Factory (CAKE) were trading at forward PE multiples of 61.96x and 15.59x, respectively.
To increase throughput and enhance customer experience, Chipotle is expanding its technology-enabled second make-line from 62 restaurants to 200 restaurants by the end of 2017. Also, the company is planning to launch a new Chipotle app in November, which is expected to enhance customer experience, marketing capabilities, and service speed. Along with these initiatives, the company has been testing potential new menu items at its “NEXT Kitchen.” After receiving favorable feedback, these new menu items will be introduced in restaurants. All these initiatives are expected to increase the company’s expenses. If these measures fail to generate expected sales, the increased expenditure is expected to pressure the company’s earnings.
For the next four quarters, analysts expect the company to post EPS growth of 47.2%, which could have been incorporated into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, the selling pressure could bring the company’s stock price and valuation multiple down.
Next, we’ll look at analysts’ recommendations and target prices.