Summary
- Chipotle earned $ 3.88 per share ($ 0.22 above estimates) and reported comp sales growth of 10.4%.
- After hours Chipotle’s shares declined 5%.
- I rate this as an overreaction by the market; the price decline generates a good buying opportunity.
Chipotle (NYSE:CMG) reported its Q1 earnings after the market closed today. The company reported revenue growth of 20% (to $ 1.09 billion), comparable restaurant sales growth of 10.4% and earnings per share of $ 3.88, a beat by $ 0.22.
Key facts about earnings
49 new restaurant openings and comp sales growth of 10.4% pushed revenues to $ 1.09 billion (from $ 904 million in Q1 2014).
Food costs were down from 34.5% of revenues to 33.9% of revenues, obliterating concerns about rising food costs and a (proclaimed) negative effect on earnings. Other operating items improved as well: Labor costs were down to 22.4% from 23%, G&A decreased considerably from 7.4% to 5.8%. Since other operating costs were mostly flat Chipotle was able to raise its operating margin by 320 basis points (from 15.0% to 18.2%).
Chipotle’s income tax rate was down from 39% to 38%, this resulted in net income of $ 123 million, an increase of 48% over last year’s $ 83 million in the first quarter.
With 31.6 million average diluted shares outstanding this means (diluted) earnings per share of $ 3.88 ($ 3.95 basic), an increase of 47% year over year.
Chipotle generated $ 243 million in cash flow from its operations, up 35% year over year, this gives the company an annual operating cash flow run rate of almost $ 1.0 billion. Chipotle’s cash position grew to $ 540 million, the company has no long-term debt.
49 new restaurant openings in the first quarter bring the company’s total number of restaurants to 1831. Average sales per restaurant breached $ 2.5 million for the first time ever (up 13% yoy and up 2% over Q4 2014).
Chipotle’s outlook for FY 2015 remains unchanged, the company expects 190 to 205 new restaurant openings, a tax rate of 39% and comp sales growth in the low to mid single digits.
Price action after hours
Chipotle beat the average EPS estimate by $ 0.22 (6% higher than estimated) and missed the revenue estimate by $ 20 million (a miss of 2%).
Despite the big EPS beat and an unchanged forecast, the market reacted negatively: Chipotle’s share price went down 4.7% after hours. Commenters blamed this on the low comp sales guidance, despite the fact that the company’s management hasn’t changed the guidance, low to mid single digit comp sales growth is what the company has guided in its Q4 2014 earnings call as well (the price went down over six percent after hours after the Q4 earnings call).
Chipotle has always been conservative with its guidance, and the actual results have usually been better. The fact that the market was awaiting a higher guidance seems irrational, because it is not the style of Chipotle’s management to be aggressive with its forecasts.
I thus also think the price action after the earnings release (Chipotle is down 4.7%) is an overreaction and could offer a good entry point for investors.
Valuation
Chipotle’s trailing earnings per share are $ 15.37; with its after hour share price of $ 667, this equals a trailing P/E ratio of 43.
A P/E ratio of 43 is a valuation we haven’t seen so far this year; I think this provides a good buying opportunity for investors right now.
With Chipotle’s consensus EPS estimate of $ 17.30 for FY 2015 and $ 20.66 for FY 2016, Chipotle’s forward P/E ratios are 39 (for FY 2015) and 32 (for FY 2016), respectively.
Chipotle beat EPS guidance by $ 0.99 in the last for quarters (total). If we assume that Chipotle will keep performing better than analysts’ estimates, actual FY 2015 could be as high as $ 18.50 (average beat of 7%). FY 2016 EPS could reach $ 22.10; in this case the one-year forward P/E ratio was just 30.
As you can see in the above chart, Chipotle has been valued at 45 to 60 times trailing twelve months earnings over the last year. Since the company’s valuation declined to just above 40 at today’s price, investors are offered a huge discount compared to how the company was valued in the past, allowing for a fair entry price.
Chipotle saw a large price decline after its Q4 earnings release as well (6% after hours), but the share price recovered in the following weeks. I think something similar will happen in the near future: The market will realize that the sell-off after the earnings release was unaccounted for (since it was due to a somewhat artificial reason, no rise of guidance), and since a trailing earnings multiple of 43 is low compared to what investors were willing to pay for Chipotle in the past, multiple expansion (and thus price appreciation) seem likely.
Outlook
With 200 new restaurant openings in 2015 (an increase of 11%) and ongoing comp sales growth, we will be looking at revenue growth in the mid single digits this year (using Chipotle’s conservative guidance). Recently analysts and commentators warned about rising food costs and a proclaimed negative effect on Chipotle’s earnings, but we’ve seen in this quarter that those fears are not justified. Chipotle’s food costs (relative to its sales) declined. This bodes well for high net income growth this year.
For the long term, Chipotle’s growth outlook remains stellar: There is still plenty of room left in the US for Chipotle restaurants (McDonald’s (NYSE:MCD) has 14,000 US restaurants), international markets haven’t really been tapped yet, and the company has shown it is able to expand its fresh foods concept to other restaurants, such as its Shophouse and Pizzeria Locale places.
The consensus estimate for the company’s EPS growth rate for the next five years is 21%. This means that, five years from now, we will be looking at (trailing) earnings per share of $ 40. If we apply a P/E multiple of 30 (the same as Starbucks’ (NASDAQ:SBUX), which is a more mature company than Chipotle), we get a share price of $ 1200, or an upside of 80%. This would mean annual returns of 12% for investors over the next five years.
With a huge cash balance of more than $ 500 million and strong cash flows from operations, Chipotle is easily able to afford further national and international expansion without tapping debt markets, and I wouldn’t be surprised if the company ramped up its share repurchases in the near future.
Summary
I wrote about Chipotle’s great fundamentals and growth outlook in a previous article, but concluded that it was too expensive at the time (the company had an earnings multiple of 58). Since the company’s valuation declined considerably, I think Chipotle’s shares are attractively priced right now.
Chipotle delivered great results and beat estimates where it counts (earnings per share). The price reaction to the earnings presentation makes Chipotle attractive at this price, bringing the company’s trailing P/E ratio down to 43, a level it hasn’t been at in the last twelve months. With good growth prospects in the near and far future, I think this is a good time to get into this growth company at a good price.
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