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TheStreet Open House

Chipotle IPO is a Fiesta

Investors piled into the initial public offering of Chipotle Mexican Grill (CMG) Thursday. But as the stock gets a chance to simmer in the market, investors could find that their optimism about the burrito chain is based on a hill of beans.

After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44 Thursday, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald's (MCD), sold 1.8 million shares. Morgan Stanley and S.G. Cowen led the underwriters.

The casual dining chain's dizzying debut marked the biggest opening-day gain for a U.S. IPO since late 2000, according to Thomson Financial. It marked the biggest opening-day percentage gain on the New York Stock Exchange since Martha Stewart Living Omnimedia (MSO) went public in 1999.

"Mutual funds are busy buyers in this thing, and there's some enthusiasm about the restaurant segment in the market right now after some good performances," says Richard Peterson, senior researcher with Thomson Financial.

On Tuesday, Applebee's (APPB) reported a 6.3% jump in same-store sales, or sales at stores open at least a year, for the four-week period that ended Sunday. In response, a slew of analysts upgraded restaurant stocks, boosting shares of Outback Steakhouse (OSI), Darden Restaurants (DRI), Ruby Tuesday (RI) and Brinker (EAT).

This enthusiasm appears to have set the stage for Chipotle's gains. Investors are excited about the chain's growth potential as its CEO, Steven Ells, said he plans to use the bulk of the proceeds from the IPO to open 80 to 90 stores this year.

The 13-year-old burrito and taco purveyor currently has about 480 stores and produced revenue of $471 million in 2004, up 49% from 2003.

At $44, shares of Chipotle are trading at roughly 80 times earnings. Meanwhile, Applebee's and Ruby Tuesday are trading closer to 20 times earnings, making Chipotle's valuation look laced with some irrational exuberance, even when its growth prospects are accounted for.

Part of the IPO proceeds will be used to pay down a $30 million line of credit with Chipotle's parent.

After the offering, McDonald's will have an 88% voting interest in Chipotle and a 69% economic interest. The fast food giant's decision to sell part of Chipotle in the public market was announced last fall, amid shareholder pressure to take action to boost its stock price.

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