Taco Bell makes a good buck selling the same five cheap ingredients in different combinations for a low price. Chipotle Mexican Grill does the same thing, basically, for a premium price. The extent of Chipotle's ingenuity, though, remains lost on Wall Street. That became clear when the company posted first-quarter earnings earlier this month. It reported profits of 38 cents a share, easily surpassing the average analyst estimate of 32 cents.
Janus Capital analyst Eileen Hoffman says she understands why analysts are underestimating Chipotle. Many Wall Street analysts work on or near, well, Wall Street. They don't quite grasp the Chipotle phenomenon because the stores haven't been in New York City that long. Yet, she says, "there's a 30-minute wait at lunch time" for those restaurants already in Manhattan, "and you can't build them fast enough."
Hoffman had an edge in "discovering" Chipotle. Both Janus and Chipotle are based in Denver, and Hoffman says she eats at the original store every other week or so. What does she order? Nothing in particular, she says -- "it's a very limited menu." Customers have their choice of burritos, tacos and "burrito bols," which are the contents of a burrito without the tortilla. The ingredients are definitely a step up from Taco Bell, with better grades of meat and excellent guacamole (which will cost you $1.50 extra).
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Still, this isn't lobster and truffles. Hoffman estimates that the gross profit margin on Chipotle food is 80%. That means that Chipotle pays just $1 for the raw materials that go into every burrito that it sells for $5. (The company says the margin is 68%.)
The stock is expensive, Hoffman concedes, but worth it. Chipotle (symbol CMG) closed May 9 at $77.69 (virtually unchanged for the day), or 48 times the $1.71 per share that analysts, on average, expect the company to earn this year, according to Thomson Inc. Hoffman believes the chain can easily quadruple the number of its stores, and the trend of sales-per-store increases will continue. "Smaller stories actually sometimes do more sales because the frenzy of trying to get into this place" attracts even more customers, she says.
Analysts forecast that earnings can increase 25% a year over the next few years. Hoffman predicts that the stock can double in the next three.
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