Chipotle Mexican Grill (NYSE: CMG) is known for two things: its big and very tasty burritos and its ridiculously overpriced stock. Chipotle was trading at $650.35 a share on October 22, 2015.
Since many people tout Chipotle as the future of fast food, it is a good idea to see if it actually makes money. This is doubly important because the Denver-based burrito house is certainly the model for companies like Shake Shack (NYSE: SHAK), a burger chain with a cult following similar to Chipotle. Shake Shack was also overpriced; it was trading at $42.91 a share on October 22, but it reported a TTM revenue of $152.85 million on June 30, 2015.
Yes, Folks, Chipotle Makes Money
Okay, so does Chipotle make money? The answer to that question is definitely yes; it just does not make nearly enough money to justify that $650 stock price. The financial numbers indicate that Chipotle’s business model is certainly profitable although not necessarily for investors.
On September 30, 2015, Chipotle reported these financial numbers:
- A TTM revenue of $4.57 billion, a $695 million increase over September 2014 when Chipotle brought in $3.883 billion in revenue.
- A net income of $528.96 million
- A profit margin of 11.91%
- A free cash flow of $119.99 million
- Cash and short-term investments of $959.74 million
So Chipotle is certainly a profitable little company, but it’s an overpriced one. It had an enterprise value of $19.8 billion and a market capitalization of $20.27 billion on October 22, 2015.
Why Chipotle Is the Opposite of a Value Investment
Chipotle is definitely a profitable company with quite a bit of cash for the industry it’s operating in. On September 30, 2015, the much larger Yum Brands (NYSE: YUM), operator of Pizza Hut, Taco Bell and Kentucky Fried Chicken, had $861 million in cash and short-term investments, while Domino’s Pizza (NYSE: DPZ) had just $32.51 million.
Despite that, Chipotle is the opposite of a value investment because it is so overpriced. Interestingly enough, cash is not the only attribute of a value investment that Chipotle has. It is also a very well-run company as anybody who has visited its restaurants knows well. Chipotle makes a very good product that it sells at a higher price, and it has a loyal customer following.
If that was not enough, Chipotle is very much at the cutting edge of the restaurant industry. Its business model is so successful that other chains are imitating it. Shake Shack is certainly a Chipotle clone, and even McDonald’s (NYSE: MCD) has been trying to beat off fast food obsolescence by adopting some of Chipotle’s methods.
Like Amazon.com (NASDAQ: AMZN), Chipotle proves that good companies are not always value investments. A very good company can be the exact opposite of a value investment because of an inflated stock price.
Don’t Invest in Fads
The important lesson that Chipotle is teaching us is do not invest in fads. Just because something is popular, cutting edge or fashionable—all of which Chipotle certainly is—it is not necessarily a good investment.
The other important lesson is that making a lot of money will not always make a company a value investment. A high stock price can make even the best companies a poor investment.
If you want to invest in Chipotle, wait for its share price to come down to Earth. Unfortunately, the share price is so high right now it is going to be a long time before that occurs.