Chipotle: It Doesn't Make Sense

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet ) -- Over the past 12 months, there have been a handful of companies that have had the distinction of accomplishing that which often renders the market dazed and confused. We know about the disaster that has become Research in Motion ( RIMM), which continues to remind investors how quickly a company can become grossly irrelevant when management becomes too stubborn to adapt.

On the flipside there is Apple ( AAPL), which continues to defy all logic and common sense by producing one golden egg after the other - remarkably. It does this every six months when reason suggests that companies should not be able to what it has done.

But then again, in regards to Apple, it seems that the market has somewhat gotten around to expecting such performances to the extent that the amazement is starting to become the norm. But what does one make of a company such as Chipotle ( CMG), which has come out of nowhere to dominate not only the landscape of casual dining but also alter the backdrop of valuation metrics.

Upon the release of its IPO in 2006 the stock doubled on its first day of trading from $22 to $44. On Thursday is closed at $430. Allow that tidbit to "sizzle" for a second. So in both respects, Chipotle has applied new meaning to the term "it doesn't make sense." But then again sometimes in the stock market what "makes sense" is rarely (if ever) profitable.

One has to remember at one point it also made perfect sense to invest in former high-flyers like Lucent, Palm and even today, Research in Motion -- until of course it didn't. Leading into Chipotle's earnings results on Thursday, I was looking for confirmation that its P/E of 63 and $430 price tag still presented some value and I was pleased to see that the company did its best convincing act yet. But would Wall Street continue to buy?

The quarter that was

The company reported first-quarter earnings results that beat Wall Street estimates yet again as first quarter net income rose 35 percent to $62.7 million, or $1.97 per share - representing an increase of over 35 percent on an annual basis. The company reported revenue increase of 25.8 percent to $640 million while beating the mean analyst estimate of $1.93 per share or above the expected $630.6 million. That is a pretty remarkable performance when one considers that this is the third consecutive quarter that the company has demonstrated an increase in net income while also generating revenue growth in the double-digit areas for five consecutive quarters.

So this goes back to the premise of the article, does Chipotle still make sense? I think the evidence is quite clear. Not only does the company receive tremendous support from investors, it is clear that by its recent string of earnings beats the company continues to benefit from a strong loyal customer base that loves their burritos - one that generated strong customer traffic as well as stronger sales volume. To support the growing demand, Chipotle has gone through an aggressive expansion plan to where it now has 1,230 restaurants as it expanded by adding 150 new locations in 2011. But it does not plan to stop there as it said it will open between 155-165 new restaurants in 2012.

So for now, it seems the company's growth will continue and its stock price is deserving of such high multiple. During the conference call, the company's CEO and founder Steve Ells said the following:
"We're delighted that our continuing efforts to serve the very best food made from high quality ingredients raised with respect for the animals, the environment, and the farmers are resonating with our customers, allowing us to deliver double digit comps and record earnings during the quarter."

Bottom line

This is clearly a company that is not only doing all of the right things, but also says the right things. Chipotle has an excellent business that is thriving in a tough competitive environment. But from an investment standpoint it is hard for me to see the value in the shares at such an enormous P/E. But if there is a restaurant operator that deserves such a high multiple and demonstrates consistently that it can grow into its valuation while pleasing Wall Street, it is Chipotle. Its' proof is in the results. So who am I to say it doesn't make sense?

At the time of publication, the author was long AAPL and held no positions in any of the stocks mentioned, although positions may change at any time.

At the time of publication, the author was long AAPL and held no positions in any of the stocks mentioned, although positions may change at any time.

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