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Is Growth on Chipotle's Menu?

NEW YORK (TheStreet) -- Finding a good growth story and trying to make a case for why it belongs in a value investor's portfolio has always been difficult.

There's the excitement of growth, but more often than not that growth comes at an expensive premium and there are no guarantees the company will ever grow into that valuation.

This summarizes my relationship with Chipotle Mexican Grill (CMG), a stock I've always wanted to like but just can't. Add recent concerns about margin pressure and slowing comps and the stock becomes even less appealing.

The food is delicious, yes. But owning the stock requires a strong stomach. The company posted a 17% year-over-year increase in revenue but it arrived flat sequentially. If you really want to get technical, there was actually a 0.20% drop from the third quarter. It may be splitting hairs but it's an example of how the optimism in this stock -- based on strong growth -- seems overdone.



The company posted just 3.8% growth in comps at the end of 2012. This is the metric that tracks the performance of restaurants opened at least one year. While that is on par with the 5% posted by Yum Brands (YUM) and the 3.1% posted by McDonald's (MCD), this comp number is still an example of what has been a disastrous year for Chipotle.

Consider that its comps were at 11.1% in 2011 when the stock began trading around $360 in January 2012. However, comps dropped to 8% in the second quarter, and then to 4.8% in the third quarter before ending the year at that 3.8% figure. That the price-to-earnings ratio is twice the valuation of McDonald's (36 vs. 18) implies investors are still betting big that Chipotle can turn things around.

But this quarter didn't prove anything other than to suggest Chipotle is still in trouble.

Where's the Growth?

Without answering this question, it's tough to make a case why anyone would go long on this stock at current levels, especially after the recent volatility. Granted, Chipotle's business concept --using local, fresh ingredients for many dishes prepared in an open kitchen, according to the company -- is still being embraced by diners. That's the only reason management would invest so heavily in expansion to the extent of saying it planned to open 165 to 180 restaurants this year.

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