Hi Phil Town,
I continue to watch Chipotle Mexican Grill (and eat their food!).
Here is my take on the 4M's.
Meaning. Chipotle's concept is "gourmet fast food" - food that takes hours to prepare and seconds to serve. They have a very simple menu - burritos, burrito bowls, tacos and salads. The customer chooses from several meats, beans, salsas and other extras, resulting in thousands of variations. The food is excellent, served in under a minute, and a great value (~$6.00 for a burrito and a drink).
Moat. Chipotle has a brand moat. They promise excellent food and deliver it consistently from store to store. All of the ingredients are fresh. Even simple items like rice and guacamole are made from proprietary recipes and are excellent. They believe that their "food with integrity" program (naturally grown meat) can result in better quality along with better financial results.
The stores are similar but intentionally not the same. The style is self serve casual, with rapid table turn over and a significant carry out business.
Big 5. Recent financials have been excellent, but Chipotle does not have the track record required for Rule #1 investing (data from Investools):
- 5 Yr ROIC [2001 - 2005]: (243%), (62%), 3%, 9%, and 19% respectively
- Equity Growth [2003 - 2005]: 30%/yr (only data available)
- EPS was negative through 2003. 2004 Earnings: 30 cents/share 2005 Earnings: $1.50/share
- Sales Growth [2005]: 33% (57% over the last 5 years)
- Free Cash Flow [2004]: ($56M) [2005]: ($6M)
- No long term debt
Management. The founder and CEO Steve Ells opened the first restaurant 13 years ago (they have about 500 now). He has trained and worked as a chef, and developed the Chipotle concept and recipes. The company seems to treat its employees above average, believing that happy employees lead to happy customers. Ells earned around $900k (salary and bonus) on revenue of $627M in 2005, which seems reasonable. Senior management owns around 5% of the company.
One weirdness with Chipotle is that McDonald's owns about 90% of the stock, following an IPO in January '06. The CFO and HR/IT VP bring McDonald's experience to the company. Chipotle states that it currently leverages McDonald's in areas such as its relationship with Coke, benefit administration and Real Estate acquisitions. These perks will go away over time as McDonald's divests itself.
There are several classes of stock. Chipotle announced in May that McDonald's would sell around 4 million shares (out of 32M total) at $61.50.
MOS.
- TTM EPS is $1.60
- EPS Growth rate. The growth rates are all over the place. Q1 2006 earnings more than doubled from $0.10 to $0.26. I'm not sure the recent equity growth rate of 30% is sustainable, so I'll dial it back to 25% (mgmt projection in '05 annual report).
- Estimated future PE. 2 x 25% is too high. Use the current PE of 38.
Turning the crank, I get a 10 yr projected EPS of $14.90, future price of $544, sticker price of $140, and MOS price of $70. Chipotle is selling for $63.
Here are some highlights from a recent Chipotle presentation at Morgan Stanley (6/14/06):
- The CEO and COO interview every store manager to insure that they are top performers who can develop people.
- They believe their use of natural foods ties into a growing trend of people caring about what they eat, and they mentioned Whole Foods as another example.
- They will maintain a focused, simple concept while allowing the customer to tailor the food based on taste or diet.
- Management is very focused on details of store performance (transaction time, register speed, etc.).
- They believe their company culture attracts high performers.
- Store margins have grown consistently from 10% in 2002 to 20% now.
Summary. I love the food and would love to own the whole company. Chipotle appears to have great growth potential, but doesn't have sustained, consistent financial performance, particularly ROIC. Is this company really worth $140/share?
regards,
- lee
Here's Phil Town response:
Nice job, Lee. Thank you from all of us. I'm a big fan of Chipotle. I think they may be this generation's MacDonald's. Excellent quality of food. Heathier food. And still fast. Real fast.
When I was a kid, going out for fast food was all about Micky D's. $0.19 burgers. Cheap, good and fast. Today, my kids won't go there. My brother's kids, young teens, have never been to McDonald's. But they go to Chipotle about three times a week.
So let's hear from you about this: Panera Bread is competing for a piece of that fast 'healthy' food marketplace with Chipotle. Meanwhile Sonic is going up against the old burger franchises and doing well in the South. So if we like this industry and think we understand it and we can only buy one of these excellent businesses, which one should we buy?
Now go play,
