This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Chipotle's Still Sizzling Ahead of Earnings

NEW YORK ( TheStreet) -- If you want to define "chipotle," as in Chipotle Mexican Grill (CMG), just take look a the company's stock price, which is up close 20% over the past three months and is up 50% year-to-date. At a price-to-earnings ratio of 46, more than twice the valuation of Yum! Brands (YUM), these shares carry some eponymous heat.

I don't deny that Chipotle has built itself into a leading fast-casual restaurant that's posting strong growth and above-average margins. To the extent that the company now deserves a P/E that is almost 3-times that of McDonald's (MCD), I don't believe it does. Not to mention this leaves absolutely no margin for error in an environment where discretionary remains unstable.

I will credit Chipotle management for growing same-store sales and managing costs. On Thursday, when Chipotle reports third-quarter results, the company will get a chance to convince the Street that the valuation is deserved. Analysts will be looking for earnings of $2.78 per share on revenue of $820.28 million, which would represent earnings and revenue growth of 22% and 17%, respectively.

Given that Chipotle has consistently posted double-digit profit and revenue growth, the Street is not expecting the company to divert much from its historical performance. What I am interested in (among other things) is how the company continues deal with the rising costs of chicken and beef from suppliers like Tyson (TSN).

If anything has kept the stock sizzling, it's been Chipotle's strong restaurant-level margins, which registered an astounding 27.6% in the July quarter. While that number is significantly higher than both McDonald's and Yum! Brands, I did notice a 160-basis point decrease. Chipotle has called that a "trivial" decrease. But let's not forget that it was preceded by 110-basis point decrease in the April quarter.

Now, I don't want to make too much this, but should restaurant-level margins decrease again on Thursday, it then becomes a trend. My issue here is that, while Chipotle's overall profit margins still remain high relative to its quick-service peers like Panera (PNRA) and Qdoba, which is owned by Jack in the Box (JACK), this is because Chipotle operates a premium-priced restaurant.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs