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Is Chipotle a Value Stock at $230?

BOSTON ( TheStreet) -- Fast-casual darling Chipotle Mexican Grill (CMG - Get Report) has delivered three-year annualized gains of 19%. Among the market's most beloved stocks, Chipotle commands a lofty book value multiple of 9.1 and a cash flow multiple of 25, premiums of 40% and 98% to restaurant peer averages. Few would argue that Chipotle is a value stock, but for those who believe in the company's growth prospects, it may still be a bargain.

The consensus on Chipotle is that it has surpassed fair value. Of analysts following the stock, 11 rate it buy and 12 rank it hold. In fact, Chipotle is roughly 11% above analysts' median target. More telling, it has run past every individual target, including the $195 projection of Deutsche Bank and the $215 prediction of Raymond James. Traditionally overzealous sell-siders are baffled by this momentum. But, the stock just keeps chugging. It has advanced 53% since September. On Friday, the S&P 500 Index rose 0.2% and Chipotle popped 2.8%.

The obvious question is: Who would be willing to buy Chipotle at such an absurd premium? Although the company still has solid growth prospects, they are largely predictable. Chipotle doesn't franchise its restaurants and has clearly stated that it will open 135-145 new restaurants in 2011. And comparable-store sales, while impressive at 11% in the latest quarter, can't grow ad infinitum since the comps just get harder and harder to exceed. Recent growth catalysts? Founder Steve Ells plans to open one, just one, Asian concept restaurant in 2011. Not accretive.

But by playing with growth rates and expansion prospects, we see that Chipotle may not be as overvalued as it appears. A new tool by Trefis, a research company focused on the product breakdown of publicly traded companies, shows the assumptions underlying Chipotle's stock price and how its growth rates could materially affect the equity's trajectory. The charts are adjustable, so feel free to manipulate the inputs to see how they affect the stock.

As you can see, Trefis is pessimistic about Chipotle. Modeling the business on a cash-flow basis, it values the stock at $139, suggesting that it is 40% past fair value. However, assumptions are somewhat bearish. Trefis assumes that Chipotle's EBITDA margin will decline steadily in coming years, despite the fact that it has nearly doubled since 2005.

Trefis forecasts that Chipotle will add 100 restaurants a year on a going-forward basis, which may be pessimistic. If you ratchet up Chipotle's restaurant growth to say, 200 a year, equal to four per U.S. state, a reasonable assumption, then its stock price jumps considerably.
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