Chipotle: Avocados Are Dangerous – Chipotle Mexican Grill, Inc. (NYSE: CMG)

Chipotle Mexican Grill (CMG) is expected to yield admirable revenue growth during 2019, and the market estimates that it will grow very well over the next few years. Investing in the company presents an unhealthy risk-reward proposal with an acceptable disadvantage and bland upside potential at a high price.

Chipotle is a large-cap company with a market size of around $ 23 billion and solid economy. CMG's dependence on avocado complicates its expansion plans overseas and can reduce the company's gross margin and increase the risk of an already expensive stock.

Avocado and other restrictions

The most representative ingredient in Chipotle is arguably the avocado. Many of the campaigns depend on offering Guacamole, and it is often used to push vegan and vegetarian options on the menu. While the fruit is delicious and healthy, the prices are unstable and highly prone to macroeconomic trends.

Source: PES

The avocado price in the US fluctuates depending on the cost and availability of the avocado in Mexico; the additional restrictions are created by drug cartels and the now sensitive US-Mexico trade relationship.

In addition to the avocado price dependency, Chipotle will face several problems expanding its menu overseas. Many of the critical ingredients in the Chipotle menu are expensive in Europe, and customizing the menu and prices will reduce the edge it has grown in the United States. The expansion in Germany, for example, began in 2013, and this year it opened the second location, and the French market has behaved in similar ways.

Because of the style of the kitchen, it might not be a good fit for Latin American markets either. Chipotle would face competition from several similar local proposals already accustomed to local needs and cultural food traditions. While Chipotle may not rely on international revenues to deliver its revenue growth targets for the next few years, limiting its geographic potential puts a glass ceiling on the potential and may hinder the company in the future.

Valuation

For the past year, revenue growth has had a maximum and minimum of -13.3% and 14.9% with a tendency to be down. The forecast estimates an average revenue growth of 12.3% compared to the last average of 4.9%. Gross margin has had a minimum and maximum of 9% and 24.6% respectively, and the trend has been down. The estimate estimates an average gross margin of 14.9% compared to the last average of 16.9%. Considering that G&A as a percentage of turnover will have a minimum and maximum of 6.9% and 6.6% respectively, we have the following chart.

Source: Author's Charts

These approaches are in line with Chipotle's market expectations over the next couple of years, as the image below shows.

Source: Seeking Alpha

I like to use Peter Lynch's ratio when valuing a stock. This method uses the ratio of expected earnings growth plus dividend to P / E for the stock to determine fair value. A stock that has a 1: 1 ratio is reasonable. The higher the number, the more underpriced the stock is.

Source: Author card

This assessment takes into account the assets and liabilities of the company and the expected change in equity the company will have in the future. . The growth that was assessed in the valuation is the average annual growth over the next few years, with reference to non-GAAP earnings.

This valuation presumably means that the share is in the worst case overvalued by 65% ​​and at best overvalued by 47%. So the stock is overvalued.

Source: Author's Charts

By creating an adjusted Beta PERT risk profile for the long-term outlook for the stock, we can calculate the risk profile for the company.

Source: Author Map

The risk profile shows that there is an 87.73% probability that Chipotle will ever trade at a lower price than it is today. Considering the potential downside, upside and probability of each, the statistical value of the opportunity to invest is now at -3%.

Let's explain in more detail the statistical value of the opportunity to invest in a company. The statistical value is the sum of all the possibilities of an event or proposal, multiplied by their respective output.

Bet heads on a coin flip, where if you win, you will get 100% return, but if you lose, you lose 100%, have a statistical value of 0%. If someone were to bet an endless number of coin flips, they would end up with the same money they started with.

On the other hand, if the odds of the coin flip were heads, you win 200%, and tails, if you lose 100%, the statistical value of the bet will be 50%.

Chipotle's value of -3% shows that although it may produce some growth in the future, it is statistically unwise to invest in the company. [19659027] Conclusions

Although the level of debt is acceptable, the disadvantage potential is low and the financial solvency is solid, the risk level is unhealthy, the expected return for next year is horrible, the risk reward is full and the price is disappointingly overstated.

Chipotle is a beautiful company with fantastic growth prospects and an unlucky risk with avocados it eds. However, the stock is dramatically overpriced and there is no statistical edge in acquiring the stock. If Chipotle manages to perform at the highest end of the spectrum over the next four years, the value will only be slightly higher than it is today.

If there is anything in this article, you agree or disagree with or want me to expand further, I would sincerely appreciate you leaving a comment. I will address it as soon as possible.

Disclosure: I / We have no positions in any of the listed shares, and have no plans to start any positions over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.