Chipotle Mexican Grill, Inc. – Intrinsic Value for Value Investing

Chipotle Mexican Grill

Provide Food With Integrity – Chipotle’s Mission Statement

Chipotle Mexican Grill, Inc.’s current (01/24/22) market price is around $1,400 per share, trading as high as $1,930 late last summer (summer of 2021). The market price is hyped up on the strong belief that this company will generate incredible results over the next few years. The truth of the matter is this: even if you took the absolute best quarterly result from the last five years, extrapolated that value as the normal value for Chipotle, then doubled its growth rate, the maximum best value for Chipotle would equal $480 per share. To put this succinctly, the market price for stock is so overpriced that the best term to describe this is ‘irrational exuberance’ (Alan Greenspan, December 5, 1996). 

There is no doubt this company produces a great product that is loved by millions of consumers. Even more, Chipotle has grown in leaps and bounds with volume of restaurants over the last ten years (adding 1,300 restaurants in eight years); it currently has 2,900 locations. More importantly, Chipotle’s gross margin has improved to a respectable 11.9%. Add to this, Chipotle has not recorded a loss during the last ten years. However, Chipotle’s financial model does not mirror the fast-food restaurant financial model customarily found with franchised operations such as McDonald’s, Wendy’s, Restaurant Brands International and Dominos. Furthermore, the law of diminishing returns will begin to dampen growth and impact the ability of Chipotle to maintain a high quality meal. In effect, the growth experience that Chipotle has seen can not endure. Instead of seven and eight percent annual growth rates experienced over the last ten years, growth will shrink to a more realistic four and five percent per year. 

The growth rate is one of the three most important elements when determining value. Using Graham and Dodd’s famous intrinsic value formula advocated from their life’s work (Security Analysis), value equals average yearly earnings over the last three years times ((8.5 plus (2 times expected growth, as an absolute value, over the next seven years)). This turns out as follows:

VALUE = Average Earnings of $10.57 times ((8.5 + (2X5)), assumes a 5% average growth rate for the next seven years;
VALUE = $10.57 times 18.5;
VALUE = $195.55

In general, Chipotle Mexican Grill, Inc. is worth about $196 per share. Many readers will find this unbelievable given the fact that the market’s current price is over $1,400 per share. How can this dramatic difference exist? This article will answer this and substantiate that indeed the intrinsic value is less than $180 per share. Optimum buy price is around $153 per share which provides a reasonable margin of safety for the investor. Furthermore, it will explore how the market has driven the share price to such an irrational level of value.

To the reader, you have to be realistic about this situation. NO COMPANY THAT EARNS LESS THAN $25 PER SHARE PER YEAR IS WORTH MORE THAN $600 PER SHARE. There are no justifiable characteristics that can substantiate such ludicrous values over $600 per share. Any credible resource, accountant, finance guru, or economist will tell you this. If anyone says otherwise, their educational background and experience should be questioned. The simple truth is that buyers and sellers of this stock are conducting business on speculation and not sound business principles. Do not get caught up in that foolish behavior. 

© 2022, David J Hoare MSA. All rights reserved.

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