Chipotle (NYSE:CMG) again confirmed it remains on a growth path in its fourth-quarter earnings report. The Denver-based restaurant chain handily beat revenue estimates. It also came in ahead of expectations when accounting for one-time costs. This sent Chipotle stock surging higher in morning trading.
CMG stock has put the health-related scares behind it. Customers have returned to the stores, and growth rates remain elevated. However, given its momentum and lofty valuation, investors should consider selling into this news.
Chipotle Stock Beat Revenue, Adjusted Earnings Estimates
For the fourth quarter, the company reported income of $1.15 per share. That amounts to a decline from the same quarter last year when CMG earned $1.55 per share. However, when one-time costs such as store closures and restructuring are not included, earnings came in at $1.72 per share. This figure exceeded consensus estimates of $1.37 per share.
CMG also earned $1.23 billion in revenue during the quarter. This beat analyst expectations of $1.194 billion and showed a 10.4% increase from last year’s levels. Comparable sales grew by 6.1% over the same period.
Traders reacted favorably to this news as Chipotle stock rose by nearly 15% in morning trading. As a result, CMG stock trades at its highest level since the E. coli scare of 2015 began a steep decline in the stock. At that time, multiple stories calling the restaurant chain’s cleanliness into question hammered CMG. Over the following two years, investors would see the stock lose almost two-thirds of its value.
However, Chipotle stock finally began its turnaround in late 2017. Since that time, it has more than doubled in value. As a result, concerns have shifted from health scares to multiples. Seeing the stock around the $600 per share could lead to questions about whether the move higher has run its course. The forward price-to-earnings (P/E) ratio has risen to around 50, while the current P/E has risen above 88.
Growth, Issues Don’t Justify the Current Multiple
CMG has traditionally traded at high multiples. Moreover, the expected profit growth of 40.3% for fiscal 2019 could help justify such a forward P/E ratio. However, analysts expect profit growth will average 27.2% in the coming years. While still impressive, it may not justify its current valuation.
Furthermore, the health scares of a few years ago still weigh on investor’s minds. They may trust their local Chipotle enough to keep eating there. Still, they might feel that a scare at a different Chipotle could inspire another round of selling in the equity. I do not see another decline of over 65% in CMG’s future. However, it could easily make investors think twice about paying a premium valuation when another health scare could loom over Chipotle stock.
Also, as our own Luke Lango points out, competition also looms over the stock. The trend toward healthy fast food has driven many to choose Chipotle over fast food Mexican restaurants such as Taco Bell, a YUM! Brands (NYSE:YUM) restaurant. However, with even McDonald’s (NYSE:MCD) embracing healthier ingredients, Chipotle’s peers could take more of its business.
Prospective buyers need to keep CMG’s problems into perspective. Customers returned to Chipotle despite the health scares. Moreover, few restaurant chains benefit from 27% long-term growth forecasts. If Chipotle stock falls back, investors should consider buying. Still, at more than 88 times current earnings, investors should look elsewhere right now.
Concluding Thoughts on Chipotle Stock
Despite CMG’s high growth and robust sales, stockholders should consider selling Chipotle stock. To be sure, the health issues of previous years appeared to stop weighing on the stock in late 2017. Since then, CMG stock has more than doubled in value.
However, a high valuation coupled with increased competition could make sustaining this momentum difficult. Moreover, consumers may still hold more trust in their neighborhood Chipotle than on the company at large. While that may not hurt company revenue, it could easily make investors think twice about paying a premium price for Chipotle stock. Considering the company’s history as well as the pricey multiple, investors should do their thinking twice now, not later.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.