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Chipotle Mexican Grill] (CMG) just closed another year of growth in 2011. Investors witnessed year-over-year revenue growth of 23.6% and year-over-year EPS growth of 20.2%. These results indicate that CMG is still growing.

During 2011, CMG's stock price grew as well. The stock price started calendar 2011 at $213 and closed calendar 2011 at $338, representing an impressive 59% increase. This performance was no doubt comforting to purchasers of CMG's stock a year ago, but is CMG a good investment now while the stock trades at the $380 level? That is the key question, considering past performance is no guarantee of future performance.

As a preliminary matter, let's note that CMG's stock price has risen dramatically over the past year largely as a result of P/E multiple expansion, as opposed to earnings growth. The stock price at the beginning of 2011 was $213 with a P/E multiple of 37 based on the $5.73 EPS reported for calendar 2010. If you apply that same 37 P/E multiple to recently reported 2011 earnings, the stock price would be valued at $255 today. Instead, the stock price is around $380 currently because the P/E multiple expanded from 37 to 55.

Investors, of course, would rather see the stock price appreciate as a result of earnings growth, rather than P/E multiple expansion. A rise in the P/E multiple indicates investors are placing a bigger bet on future EPS growth, which increases investment risk.


When can investors expect meaningful international growth? At the end of 2011, the three foreign restaurant locations represented only 0.2% of CMG's total restaurant count. If it is assumed CMG opens 5, 10, and 15 new foreign restaurant locations in 2012, 2013, and 2014, respectively, and it also opens 160 U.S. locations per year during this same time frame, the international locations will represent less than 2% of total restaurant locations by the end of 2014. Unless CMG's management announces a huge expansion of its international growth plan very soon, investors should prepare themselves for the realization that international activity will not materially contribute to profits for many years, if ever.


Another factor driving recent declines in EPS growth is increased food and beverage costs. Food and beverage costs increased to 32.5% of revenues in 2011 from 30.6% of revenues in 2010. This is not likely to be a one-time occurrence. Management expects food and beverage cost increases in the mid-single digit range during 2012, and this will put tremendous pressure on margins.


In conclusion, with CMG's P/E level at a multi-year high, it appears current investors in CMG are assuming significant risk if history is any guide. CMG's P/E multiple has expanded and contracted wildly throughout its history. Now that CMG's EPS growth rate has slowed to 20% (as reported in 2011), CMG's current P/E multiple appears highly extended relative to historical levels. As a matter of utmost concern, the P/E multiple has been increasing while EPS growth has been decreasing, and investors would be wise to recognize this disconnect. After all, price and earnings are the two most important variables in any investment decision.
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