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Chipotle On the Value Menu?

NEW YORK ( TheStreet) -- Convincing growth investors that valuation will always matter has become quite the challenge. This is particularly true when stocks such as Amazon (AMZN) and (CRM), which enjoy enormous valuation multiples, continue to make fools out of people like me who insist on raising the subject.

However, every now and then an event occurs that reminds investors that expecting certain companies to consistently break the rules of future growth is a risky proposition, if not absurdly dangerous. This seems to be the case for Chipotle Mexican Grill (CMG - Get Report), which has now disappointed the Street in two consecutive quarters. On the heels of another round of punishment, investors want to know if the stock is now a great buy or still a value trap.

For the third quarter, Chipotle reported net income of $72.3 million, or $2.27 per share, on revenue of $700.5 million. The company missed EPS estimates of $2.33 per share while also falling short of revenue projections by $6.6 million. But this wasn't all bad. While the company did miss on its top and bottom line estimates, however, both earnings and revenue grew by 20 and 18%, respectively, from the same period of a year ago.

What's more, this marked the third consecutive quarter in which Chipotle has enjoyed rising net income while keeping consistent with its average revenue growth of 22%, which now spans five quarters. P/>Likewise, during that same period, Chipotle's net income has produced averaged year-over-year growth of 30%.However, as great as these facts are, it seems analysts cared more to pay attention to the here and now.

Investors were displeased the company's margins arrived lighter than expected and that same-store sales grew just under 5%, down from last year's quarter of 11% and also falling from the previous quarter's mark of 8%.

Consequently, following the announcement, Chipotle lost over 15% of its value as the stock plummeted to $243 per share from a previous close of $285 in what I can on describe as a gross overreaction.

Moving Forward

Competition from Yum! Brands' (YUM - Get Report)Taco Bell, whose new cantina menu is proving a worthwhile alternative to Chipotle, has become key. This is even though Chipotle's management insists otherwise. But Chipotle's guidance suggests that it is concerned nonetheless. For the full-year, the company expects comps to arrive in mid-single digits. It also didn't help investor's confidence that the company mentioned the word "flat" when describing comps for 2013.

Likewise, that average analysts estimates for the fourth quarter have moved down from $2.23 per share to $2.21 presumes that investors' fear regarding decelerating growth is correct. The company's challenge is to answer this question: From where is its growth going to come? Only then can investors safely answer their own questions about the stock and whether or not its current price presents value after having peaked at $442.

Bottom Line

I like Chipotle as a company, but I can't say definitively that I see value in the shares just yet -- not as the stock still enjoys a P/E of close to 30. Negative momentum can still push the shares lower to the $200 to $220 level. At that point I will be forced to reconsider.

However, until then, I think investors can find better opportunities in Yum! Brands, which seems to be eating Chipotle's lunch. Then of course, there is the old reliable in McDonald's (MCD), which is still the gold standard for value both on its menu and in its stock, which trades at almost half the multiple of Chipotle.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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