Chipotle Mexican Grill, Inc. (NYSE: CMG) has been one of the greatest spin-off stories around in the restaurant sector this decade.  McDonald’s (NYSE: MCD) spun this company off in an IPO back in early 2006 and it took just under two years for this Mexican themed fast food chain stock to rocket from under $50 to over $150 before the valuations just became too great up at those levels.

Last night the company reported earnings.  Its profit rose 23% and itposted $0.74 EPS.  We had estimates at $0.75 EPS.  Its same store salesfor the quarter were up 7.1%, which is still impressive for the currenteconomy, and it sees mid-single digit same store sales growth for2008.  Its growth plans are to open another 130 to 140 stores thisyear.

So far in 2008, it has been fighting many same issues of costs versusgrowth in a slowing economy.  In fact, 2008 has been so miserable forshareholders that got in during late-2007 that the shareholdersprobably feel like the caught serious Montezuma’s Revenge.  If you visit Chipotle’s web site you will see the first thing it addresses is that it isn’t serving raw jalapenos in light if the recent food born illness waves around the U.S. If you have ever walked past or driven past a Chipotle, it’s hard not to notice how busy the locations are.

The valuation for a slightly slower growth story seems tobe the issue besides the company noting that it has seen some selectweakness from parts of the economy and the continual pricing issuesseen by every player in the industry. 

We have also seen downgrades here from JPMorgan, RBC Capital, andJefferies. We are working off ofpre-downgrade consensus which hasn’t yet been updates, but if thecompany hits the prior estimates for 2008 (estimate $2.68) and 2009(estimate $3.38), this trades with forward earnings multiples of 26.1for 2008 and 20.7 for 2009.

Shares are down over 16% to just under $70.00, and we’d note that theydid violate the prior 52-week lows of $69.12.  Its 52-week tradingrange before today’s intra-day low of $68.41 was $69.12 to $155.49. So shares have been more than halved in the 2008 malaise and the growth here is still impressive when you consideer the current environment.  If this sell-off continues, Chipotle is going to start popping up on growth investor (or GARP) and value investor screens alike.

Jon C. Ogg
July 24, 2008

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