Cramer: What’s the Deal with Chipotle?

Source: Chipotle.com

Chipotle restaurant

“What the heck happened to Chipotle,” Jim Cramer asked Monday on CNBC’s “Mad Money.” “And what are we supposed to do about it now?”

The high-quality Mexican restaurant chain , which Cramer has been a fan of for years, reported an “apocalyptic quarter” last Thursday night, and the stock got hammered on Friday — falling 22 percent from $403 to $316.

Despite being the quintessential growth stock back when it went public more than six years ago, Cramer thinks Chipotle is no longer what it used to be. It used to boast earnings per share increasing in the mid-30s and revenue growth of around 20 percent. Same-store sales used to rise by roughly 12 percent every quarter — the highest of any restaurant chain. It was easy to see that the old Chipotle deserved a premium multiple, he said, which is why the stock was selling for 44 times 2012 earnings estimates of $9 a share before the dismal report we saw last Thursday.

And even though Chipotle’s multiple always seemed high, the company’s valuation actually proved to be cheap whenever the firm reported its quarterly results. Trading at $400 with an earnings growth rate of 30 percent and a P/E multiple of 44, Cramer said the old Chipotle ultimately “wasn’t that pricey.”

To Cramer, the new Chipotle is no longer the fastest grower. Its same-store sales growth has slumped from 12 percent to 8 percent and has now become an economically sensitive name. “That could mean that people are no longer willing to pay up for healthier food, or that the company has matured,” he said. “Neither explanation makes us happy.”

Now, investors may be wondering, “What should we be willing to pay for the new Chipotle?”

Even after last Thursday’s sell-off, Chipotle still trades at 34 times earnings — the same multiple Whole Foods gets. But unlike Chipotle, Whole Foods still counts as a momentum stock because it has “consistent or accelerated revenue growth,” even if the firm’s overall level of growth is slower than Chipotle’s. Whole Foods gives us a ceiling and momentum managers are willing to own WFM, Cramer said. But they don’t want to touch Chipotle, which means CMG should have a lower multiple than WFC, he said.

Does all of this mean investors should give up on Chipotle, or does this stock deserve some benefit of the doubt?

“Hard to say,” Cramer said. “On the conference call, Chipotle said the next quarter is trending similarly to the last one, so there may not be a quick snapback.” But overall, Cramer thinks the stock seems fairly valued at 34 times earnings. He advised investors not to buy until it trades at 30 times earnings — one times its growth rate — at $270.

The bottom line: The Chipotle of today is not the Chipotle of old. The growth is now decelerating and the business is more economically sensitive than ever before, which is why all the momentum managers who owned the stock have been selling it “hand-over-fist.”

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