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Uncertainty and Transition Hinder Chipotle

We see the narrow-moat firm as undervalued and are modestly decreasing our fair value estimate.

Securities In This Article
Chipotle Mexican Grill Inc
(CMG)

Narrow-moat

Management's outlook calling for low-single-digit comps in 2018 strikes us as realistic, with mid-single-digit menu price increases already baked in, but we think first-quarter restaurant margin guidance calling for 16.0%-16.5% (versus 17.7% a year ago) and acknowledgement that 17.5%-18.5% represents a ceiling this year (implying EPS in the $9 range) are concerns. Admittedly, incremental restaurant and employee investments will weigh on margins, but this could signal that our longer-term assumptions of mid-20s restaurant margins and midteens operating margins (below the mid- to high 20s and high teens posted at peak) might be aggressive. It’s also hard to get a clear picture of Chipotle's longer-term strategic vision (including new restaurant prototypes) without knowing who its future CEO will be. Management did not provide a time frame for concluding its search, adding a further layer of uncertainty.

We're planning a modest decrease to our $350 fair value estimate, as a reduction in longer-term margins will be partly offset by time value of money adjustments and a lower effective tax rate (30%-31% in 2018). While we see Chipotle as undervalued, we think a wider margin of safety is required, given the uncertainty inherent in the investment story.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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