DENVER, CO - The future of Chipotle's stock was the subject of heated debate during Friday's trading after Longbow Research downgraded the company from “buy” to “neutral,” citing valuation concerns according to The Street. Produce leaders will want to follow this debate closely because stock pricing is a leading indicator of consumer confidence in the future of a company. Considering that Chipotle plans on purchasing over 20 million pounds of fresh produce from local growers in 2014, the produce industry certainly has a financial stake in Chipotle's future growth and success.
For more on Chipotle's connections with local growers check out our previous article here.
So what does the future hold for Chipotle's stock? On this question industry experts are divided.
At the heart of this division is the fact that Chipotle's fundamental economic numbers are actually quite strong. Chipotle's Q2 financial reports, released on July 21st, 2014, beat analyst's expectations across the board.
Revenue increased 28.6% to $1.05 billion
Comparable restaurant sales numbers were up 17.3%
Net income rose 25.5% to $110.3 million
Restaurant level operating margin fell 30 basis points to 27.3%
Diluted earnings pers share grew 24.1% to $3.50.
Chipotle is thriving right now and this is what Mike Murphy, founder of Rosecliff Capital and CEO of Columbus Advisory Group, looked at when he stood by his positive valuation of Chipotle going forward.
“It's priced at a high multiple yes, but they're doing everything right. You go into a Chipotle and it is packed at all times...they're seeing strong growth,” he said. “Tough to buy it up here at these levels, but I am a frequent customer.”
Investment analysts at The Street agreed, giving Chipotle a “Buy” rating with a stock score of A-.
“We rate CHIPOTLE MEXICAN GRILL INC (CMG) a BUY,” their statement read. “This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations.”
Others however point at the sheer price of Chipotle's stock which, as of the end of Friday's trading session, was trading at $669.70 as a sign that the company's fundamentals, even while robust, are simply not strong enough to support a valuation of that magnitude long term. Joshua Brown, CEO and co-founder of Ritholtz Wealth Management, championed this point of view in his own analysis.
“Even the best companies...have a stumble at some point,” he said. “If Chipotle has a stumble the pain could be disproportionate with what the actual stumble is just because of how over-owned the stock is amongst the type of people that invest in these types of companies. So I think that it's a reasonable point to make that the upside versus downside if something goes wrong is terribly skewed towards losses rather than gains from here.”
Chipotle's forward-looking guidance looks strong however. According to its Q2 financial release, the booming chain plans on expanding operations by another 180-195 restaurants with comparable stores sales increases in the 'mid-teens.' While I appreciate the concerns of Brown and his associates, it is hard for me to not see this debate as an example of punishing a company for doing too well. Chipotle's fundamentals are strong, as are its forward-looking estimates. That is more than enough to make me optimistic about the company's outlook going forward.
As of the end of Friday's trading Chipotle's stock was down 0.32% to $669.70 per share. This morning trading was up 1.29% to 678.37 per share (as of 9:53am August 11th).
Stay tuned to AndNowUKnow for any future updates on Chipotle and its trading numbers.
