When thinking about Chipotle Mexican Grill Inc. (CMG), it pays to think big: big servings, a big, nearly 50 times estimated 2006 earnings per share, price/earnings ratio, and, according to McDonald’s Corp. (CMG), very big desire on the part of shareholders to take McDonald’s up on its offer to exchange 0.8879 Chipotle shares for every McDonald’s share tendered.
On Sept. 6, in the most recently published Chipotle research report, Steven Rees of J.P. Morgan pointed out that the stock reflected “expectation of a fair degree of continued comp, margin, and earnings upside for the remainder of 2006 and throughout 2007 as well as long-term benefits from substantial opportunity for G&A leverage that should occur over time.”
But later on, in that same report, he suggests that comp comparisons over the period will be “increasingly difficult.” And the table below suggests that expense leverage is decelerating.
| Sales ($ mill.) | % of sales | ||
| Cost of sales | Gen’l & admn. | ||
| 2006 2Q | 204.2 | 78.6 | 8.62 |
| 2005 2Q | 155.7 | 80.4 | 8.80 |
| 2005 | 625.1 | 81.84 | 8.32 |
| 2004 | 468.6 | 84.10 | 9.56 |
| 2003 | 314.0 | 85.35 | 10.89 |
| 2002 | 203.9 | 89.60 | 12.65 |
| 2001 | 131.3 | 94.82 | 15.77 |
It’s too early to say whether Chipotle, at about 500 restaurants and an annual sales run-rate that’s still below $1 billion, has really maxed out on cost leverage. But with an expectation from some for difficult comp comparisons and a 24 percent consensus Wall Street long-term EPS growth expectation, it’s an important issue. Given the stock’s elevated P/E, shareholders are paying a lot to watch from the orchestra.
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