CMG - Chipotle

[TwoCitiesCapital]

I eat at CMG at least 3 times a week.  I have tried the queso, I like it better with chips, but I actually don't like their chips.  I don't get it on salads, but it is good on burritos.  From a profit perspective, I think it is very high margin, with little downside, hence the rollout.  In my location, they took out chorizo, not sure if they are doing that everywhere.

 

Chorizo is still available at the two stores I go to in NYC.

[TorontoRaptorsFan]

Stock is going down...but I still have strong confidence in the stock long term. I'll keep on adding to my position.

 

Wish the rollout of Pizzeria Locale was faster. I really enjoyed it during my last trip to Colorado.

 

Haven't see queso at my local Chipotle.

[nkp007]

My local Chipotle happens to be the test kitchen in Manhattan. Tried the queso. It's good. I like it.

 

Will it change the face of the franchise? Haha. Maybe serve some breakfast burritos.

[Guest jeffswaldron]

If I were going to open a restaurant that competes for a customer's lunch money, I would not want to set up shop next to a Chipotle.  I also wouldn't want a Chipotle moving in next door.

 

A quick look at some numbers (hopefully they are roughly accurate):

 

2,250 units

2.2 mill sales per unit earnings power

1.4 billion shareholder equity = 622,222 per unit

330,000 per tax profit per unit (15 % pretax margin)

742.5 million pre-tax profit overall

8.8 billion market cap

11.85 X pre-tax earnings

 

Please let me know if there are any businesses for sale out there that I can buy for this price and these economics.

 

Finally, I recognize a deeper analysis of Chipotle's staying power must be done, but from a 30,000 foot view it looks like a fair deal for a great business.

 

As always, negative feedback and harsh criticism are much appreciated. 

 

[peridotcapital]

If I were going to open a restaurant that competes for a customer's lunch money, I would not want to set up shop next to a Chipotle.  I also wouldn't want a Chipotle moving in next door.

 

A quick look at some numbers (hopefully they are roughly accurate):

 

2,250 units

2.2 mill sales per unit earnings power

1.4 billion shareholder equity = 622,222 per unit

330,000 per tax profit per unit (15 % pretax margin)

742.5 million pre-tax profit overall

8.8 billion market cap

11.85 X pre-tax earnings

 

Please let me know if there are any businesses for sale out there that I can buy for this price and these economics.

 

Finally, I recognize a deeper analysis of Chipotle's staying power must be done, but from a 30,000 foot view it looks like a fair deal for a great business.

 

As always, negative feedback and harsh criticism are much appreciated.

 

The issue is that they are not at $2.2M AUV or 15% pre-tax margins. Given they continue to open 200+ units a year and the competition is intense, it's not an easy feat to get to either of those metrics, let alone both.

[DTEJD1997]

Chipolte is vulnerable to any future food/cleanliness problems.  If there is another food poisoning issue, CMG will get hammered particularly hard.

 

I also checked analysts estimates for next year's earnings and it appears that CMG is trading for between 30 to 23 times forward earnings.  Not particularly cheap if you ask me. 

 

I have eaten there many a time, but have cut back significantly.  Their food quality has always been OK for me....but it is just too "heavy" and sits in my stomach like a brick.  I've also heard that some of their burritos are 1,000+ calories and can have 2000 MG of sodium.  That is getting close to your daily recommended salt intake.  It is also at least 1/2 of your daily calories if not more.  Pretty tasty, but not especially healthy eating.

[Guest jeffswaldron]

I couldn't care less what an analyst predicts next year.  All food restaurants are vulnerable to food/cleanliness problems.  Your one subjective opinion on their food doesn't explain their growth from 200 million in revenues in 2002 to 3.9 billion in 2016.  They have also did so without utilizing debt and while buying back shares -- I'm not sure their product has changed much either.  Maybe they just lucked into their success and it's all over, but I think it is worth a deeper look.

"The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

- web

 

 

[JayGatsby]

I also checked analysts estimates for next year's earnings and it appears that CMG is trading for between 30 to 23 times forward earnings.  Not particularly cheap if you ask me. 

Think you have to use EBITDA here (or a similar metric). Earnings are burdened by depreciation of new store openings. 

 

I think growth prospects are good. Helpful that growth really isn't priced in. Lots of competing local concepts popping up though.

[rogermunibond]

Cold chain logistics work for most large restaurant franchises because of the operational leverage but also because ingredients are centralized stored at the appropriate temp, processed etc and then shipped to the store.

 

Every chain restaurant that eschews the cold chain and moves more food prep outside of the central kitchen/commissary is vulnerable to food borne illness.

 

 

[Gregmal]

Is there not a chance that Chipotle itself was kind of a fad? I've personally never been particularly impressive with their offerings. For the money, there's a case to be made that Qdoba or Moe's is better. Between the gristle and 100 pounds of rice they stuff each burrito with, I've always thought it was poor value and very unhealthy(although they did a tremendous job marketing their food as healthy/quality relative to other fast food). For the $12 meal at CMG, I'd rather doing a soup and salad at PNRA, pre-packaged from WFM, or some kind of sushi lunch. That's just me though.

 

I've long thought of them as maybe a Starbuck's lite, in terms of how to view them as an investment. So with a lot of their market value stuffed into "the brand", I think the way they continue to respond to food safety issues should be the top concern for investors. I haven't been particularly impressed so far.

[JayGatsby]

I've always thought it was poor value and very unhealthy(although they did a tremendous job marketing their food as healthy/quality relative to other fast food). For the $12 meal at CMG, I'd rather doing a soup and salad at PNRA, pre-packaged from WFM, or some kind of sushi lunch. That's just me though.

Mine is $7something with tax (Just went up from $6.50 to $6.80 plus tax if I remember right). Yes, if you order it with chips and a soda its not much of a value and not healthy.

 

Tortilla is something like 300 calories with no nutritional value. With the bowl and brown rice or lettuce it becomes about as healthy of any non-salad meal as you can find at a restaurant. Sodium is definitely high but that's true of basically anything not cooked at home.

[DTEJD1997]

I also checked analysts estimates for next year's earnings and it appears that CMG is trading for between 30 to 23 times forward earnings.  Not particularly cheap if you ask me. 

Think you have to use EBITDA here (or a similar metric). Earnings are burdened by depreciation of new store openings. 

 

I think growth prospects are good. Helpful that growth really isn't priced in. Lots of competing local concepts popping up though.

Even if you back in some amount for store openings...it is still trading for something like 15+ next years EV/EBIDTA.  Contrast that to CAKE which is trading for a bit less than half of that.

 

So I will stand by my assertion that CMG is not particularly cheap.  How "expensive" it is, is a matter of debate.

 

 

[JayGatsby]

Current enterprise value is $8B and last quarter's EBITDA was $150M. Run rating that gives 13x. That assumes no further rebound in traffic and no EBITDA contribution from store openings. You're right though that to really like that valuation you have to either believe that they can continue to add 200 stores per year for a number of years and/or traffic rebounds. If neither of those comes to fruition, or if there is impact from further food safety headlines, I agree you're buying in at a valuation that is at best fairly valued.

[Parsad]

I've always thought it was poor value and very unhealthy(although they did a tremendous job marketing their food as healthy/quality relative to other fast food). For the $12 meal at CMG, I'd rather doing a soup and salad at PNRA, pre-packaged from WFM, or some kind of sushi lunch. That's just me though.

Mine is $7something with tax (Just went up from $6.50 to $6.80 plus tax if I remember right). Yes, if you order it with chips and a soda its not much of a value and not healthy.

 

Tortilla is something like 300 calories with no nutritional value. With the bowl and brown rice or lettuce it becomes about as healthy of any non-salad meal as you can find at a restaurant. Sodium is definitely high but that's true of basically anything not cooked at home.

 

Hi Jay,

 

Where do you live?  If you order a bowl with brown rice and chicken and add guacamole here, it's like almost $12 CDN.  You get the same thing at two other franchises (Chopped Leaf and Freshii) here for like $8-$9.50 CDN. 

 

That being said, you go to Chipotle and the line-up is non-stop...food poisoning issues or not!  Cheers!

[JayGatsby]

Hi Jay,

 

Where do you live?  If you order a bowl with brown rice and chicken and add guacamole here, it's like almost $12 CDN.  You get the same thing at two other franchises (Chopped Leaf and Freshii) here for like $8-$9.50 CDN. 

 

That being said, you go to Chipotle and the line-up is non-stop...food poisoning issues or not!  Cheers!

Ah, that makes more sense it's in CDN. Sorry, forgot we may be talking different currencies. Still surprised it's more than other places. I'm in Colorado. We have a few similar places here, but most are similar to slightly more expensive. I know New York and such it's more expensive, but everything is more expensive there. There's a local chain that seems to do very well here... they've cracked the night/bar setup as well so they stay busy basically all the time

[DCG]

It seems like adding breakfast could be a good way for them to boost revenue. Have they considered that?

 

 

I can't really tell if the current valuation is good.

 

 

I like like eating there once in a while, but there are a couple local burrito places that are better (than I eat at more frequently). I agree that their food isn't really any better than Moes (I think Moes is quite a bit better than Chipotle), QDoba, or Bueno y Sano (which is a newer on expanding in the Northeast U.S.).

[fisch777]

Shirley you must be kidding.  Moe's slop in a wrap/bowl is the worst excuse for tex-mex I've ever come across.  Chipotle may not be top notch, but it is head and shoulders better than that $hit.

[nkp007]

In NYC, every time I walk into a Chipotle there's usually no one or one or two people in line max. Huge difference from a few years ago. Tough to reverse that.

 

Maybe it's different in other cities?

[johnny]

All food restaurants are vulnerable to food/cleanliness problems.

 

Not to the same degree. Chipotle is particularly vulnerable because such a huge part of their brand was built on the idea that they existed in a special/mystical healthier fast food tier. There’s a greater-than-normal schadenfreude involved when the annoying faux-hippies that have been implicitly attacking their industry over hocus-pocus bullshit like GMO corn have repeated problems keeping fecal remnants out of their tacos.

 

That, on top of the fact that it’s already been well-discussed that certain aspects of Chipotle’s supply chain design plausibly increase these risks over the industry standard, mean that it’s a sort of vacuous statement to simply assert that everybody faces the risk, therefore it’s a non-factor in valuation.

 

[Gregmal]

All food restaurants are vulnerable to food/cleanliness problems.

 

Not to the same degree. Chipotle is particularly vulnerable because such a huge part of their brand was built on the idea that they existed in a special/mystical healthier fast food tier. There’s a greater-than-normal schadenfreude involved when the annoying faux-hippies that have been implicitly attacking their industry over hocus-pocus bullshit like GMO corn have repeated problems keeping fecal remnants out of their tacos.

 

That, on top of the fact that it’s already been well-discussed that certain aspects of Chipotle’s supply chain design plausibly increase these risks over the industry standard, mean that it’s a sort of vacuous statement to simply assert that everybody faces the risk, therefore it’s a non-factor in valuation.

 

That's pretty much the issue with their brand. It's not authentic Mexican/TexMex cuisine. It also doesn't have nearly the offerings of a Qdoba or Moe's. It's basically just a place that sells burritos(that IMO aren't even that good) and idk, I would have to think that after a while people may want a little more for their money and a little more variety. I mean how does Chipotle not even bother to have nachos on the menu?

 

SBUX has defined themselves by expanding their offerings. Catering to millennial and the upper middle class. It's not really a coffee place. CMG to me is trying to be SBUX of fast food. The difference is all offer are burritos. And they don't even sell breakfast burritos.

[johnny]

It isn’t as if they haven’t tried. The Southeast Asian concept failed, the pizza concept has stalled, the “Better Burger” reception was tepid.

 

Full credit to Chipotle for doing what they did: they proved that you can raise food costs by $2 per ticket, raise menu prices by $4 per ticket, talk vaguely about nature, and rake in the cash. They were getting locations by offering the landlord something “better” than a standard QSR, they were retaining good employees by offering a job “better” than the standard QSR, and of course we’ve already gone over the pitch to customers. The problem is, everybody has learned this and nwo they’re competing at every level with 100 other would-bes ultimately playing the same game.

 

On that note, the quality of their staff has decreased significantly in the past few years; part of this was unavoidable—aggressive growth and a “promote from within” type culture meant that for a long time the “work your way up” narrative was incredibly compelling at Chipotle. When you’re 22 and the regional “restauranteur” is a 26 year old making $100k that had your job 3 years ago, you’re way more likely to absolutely bust your ass for a year at minimum wage. Just basic math means this is a lot less plausible/salient for todays fresh hires, and that, and it’s no mystery that they’re having trouble approaching their prior store records for throughput.

 

Keep this in mind the next time you walk by a flagship and see a long line. An easy way to make your store look busy is to give your employees regular concussions so they process orders 50% slower.

[DTEJD1997]

In NYC, every time I walk into a Chipotle there's usually no one or one or two people in line max. Huge difference from a few years ago. Tough to reverse that.

 

Maybe it's different in other cities?

 

Here in the Midwest & outskirts of Detroit, the Chipoltes are busier than that.  I walk by one from time to time, and there are always people in it...but it is never crowded.  To be fair, I am not walking by at the peak of the lunch rush though.

 

In that suburb, there is an incredible amount of competition.  There is a Del Taco maybe 100 yards away.  There is a PotBelly, Burger King, McDonalds, Hardees, Panerra, Qdoba, and a handful of local/regional restaurants within 1/2 mile.  Go out 1 mile, and your options probably double.

 

There are plenty of Chipolte clones or close competitors now.  If you want a giant burrito, and want higher quality than Taco Bell, you've got options.

 

As for the comments that ALL restaurants face contamination issues...that is most certainly correct.  Think about this though, "Joe's Burger Shed" that has never had a previous problem, has a contamination scare...that is bad & hurtful for business.  CONTRAST THAT TO CMG that has had numerous past problems, at some point they risk real, lasting, permanent damage to their brand.  That might never happen, but I think CMG faces a heightened risk level of this.

 

CMG has been a very good company from their financial & growth metrics, no question.  The big question is how much longer (if at all) they can keep it up AND what valuation level is appropriate.  I think they should trade at a premium, but only a small one at that, given their risk levels.

 

 

[Guest jeffswaldron]

I agree with everyone's reasons to be concerned about the quality and staying power of the company.  I was a Chipotle Boomer (18-24 year old in 2006) and have been a customer of this company for a decent amount of time.  My parents and people of a similar demographic never understood why we liked Chipotle so much and they usually did not like the food.  Somehow, the business still succeeded.  I can say that my social group never went there because of the message about their food -- we just wanted a lot of food fast that wasn't crap.  So, I guess we did go there because of the message in a round-a-bout way. Most of my fellow boomers still eat there, but definitely not at the same rate.  This leads me to the following questions:

 

As the Chipotle Boomers become real adults, has the company captured enough of their hearts/minds/souls to keep them as life-long, but less frequent customers?  Or was this all a result of a free ride on the fast casual wave?

 

And, have they completely lost the current 18-24 demographic?  Can they win them back?  Can they capture the future waves of these groups? 

 

[JayGatsby]

Their queso experiment has been disappointing. Probably created negative enterprise value. Product reviews are pretty poor which hurts not only sales of queso (fairly inconsequential), but also the brand as a whole. Makes you wonder what sort of product testing they did. I've heard people who thought it was bad and people who thought it was ok. Of the people who thought it was ok most thought it was better as a side than on the burrito itself. Feels a bit like Chipotle did it to appease Wall Street analysts rather than doing what they think is best for the business... usually a bad sign.

[glorysk87]

Maybe I'm crazy - but I go to Chipotle weekly, not because I think it's healthy, not because I agree with their code of ethics or the spirit of the company. I go because the food is really good and takes like no time at all to prepare. Pretty simple formula.

 

I get the comparisons to Moes and Qdoba, because they're also quick mexican places - but their food is just not very good. Especially Qdoba. Chipotle's food is fucking delicious, and that's the reason I eat there all the time.