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Friday, October 18, 2013

Boom Burrito Boom...

Another mind-boggling earnings release. One of the top growing restaurant chains lately, Chipotle (CMG: NYSE), likes to beat analysts' estimates. They have been doing that more consistently than their contemporaries because of their ability to control economy of scale and to keep attracting larger and larger customer base. While I am writing this, CMG has been up for 13.76% since yesterday's close.

Many investors really think it is inflated or overpriced. I am not in clear state to defend CMG's current price or price trend, but I would consider that as emotional bias of investors. Except Berkshire Hathway, all companies trading above $300 face the same problem. Why? These price range belongs to a tiny set of companies from a set of thousands of companies currently being traded. Isn't this bias obvious? I think it is. But let's keep behavioral finance aside and focus on fundamentals. Based on my valuation model (based on $439.07 closing price of 10/17/2013), CMG is still undervalued! Below are the few points which may help make my case:

  • Consistently decreasing debt/ equity ratio considering the fact that they have been pretty much at the same place in terms of raising capital through equity.
  • Skyrocketing growth in revenues and net income (Needless to write!!)
  • Impressive ROE year over year
  • Robust growth in operating cash flow
  • Free cash flow per share and EPS forecasts are way higher beyond the peers 
  • Based on all above, company financials, consensus estimates and other relevant market data, I am getting a fundamental stock price range of $612 to $701.
All I believe is that CMG may not be magnificently undervalued, but it is not overvalued for sure considering all numbers and forecasts.