Small-Cap Spotlight: Chewing on Chipotle

In this week's small-cap spotlight, we are looking at Chipotle Mexican Grill (CMG), a fast-casual restaurant play that was spun out from McDonald's(MCD) back in January 2006. Shares are trading at $99 a share, up roughly 100% over the past 12 months, but does this growth play have room to run or is it time to take some chips off the table?

Curzio: Much More Room to Grow

Chipotle reminds me a lot of Crocs(CROX), which we featured May 31. Like Crocs, Chipotle has reported several strong quarters in a row, critics have valuation concerns and the short ratio is very high. The company also is a high-growth play and insiders were taking profits.

Crocs has managed to beat expectations, and the stock is trading 30% higher since May 31. I think Chipotle has similar potential over the next 12 months following the recent pullback.

Chipotle is known as a fast-casual restaurant (a restaurant that has an average check of $7 to $9, which is higher than quick serve but lower than casual). The company, which serves Mexican food, has increased its store base to over 600 today from 18 back in 1998.

On Aug. 1, the company reported earnings of 60 cents a share -- 15 cents better than the consensus estimate. Chipotle has now beat estimates every quarter since becoming a public company, and management says it has 22 consecutive quarterly periods of positive same-store sales results, according to management.

Despite these results, Chipotle sold off on Aug. 8 when Barron's published an article suggesting that it's time to take profits citing valuation concerns. But I don't consider their analysis on high-growth stocks to be strong.

On the valuation front, Chipotle does trade at an expensive multiple of 40 times 2008 earnings. But the company is expected to grow earnings by more than 25% over the next two years, based on consensus estimates from Thomson First Call. Plus, growth projections could prove to be conservative given that management suggests that its penetration rate for stores in the U.S. is in the thousands.

Another contributing factor that could lead to a higher stock price is Chipotle's strong management team led by Chairman, CEO and founder Steven Ells, who has been with the company for more than 10 years. His experience has helped the company increase operating margins year over year despite higher commodity costs, which have pressured the entire industry.

Lastly, it's important not to underestimate the power of a strong brand. Chipotle has a huge buzz -- almost Croc-like -- in that everyone seems to love the place. While the company has roughly 600 stores, it operates in only 27 states and has just 17 stores in highly populated New York and 65 in the entire South Central U.S. region as of March 31.

To watch the guys discuss Chipotle on TheStreet.com TV, click here.