Sunday, January 31, 2016

The Chipotle (CMG) Buy

Chipotle has been on my watch list for a long time as a stock I always wanted to buy. We love the product, eating there often. We like their philosophy, eating responsibly. I admired the performance of the company. However, it seemed too pricey. Until recently. The E. Coli outbreak resulting in a walloping as the stock tumbled from the upper 700s to just under $400.

This price drop seems like an opportunity to buy while others are selling. Can we get a better idea of whether this stock is indeed on sale? According to analysis based on, "Fire Your Stock Analyst", we can.

We start by obtaining a history of revenue. I looked at 2010 through 2014. 2015 is not available right now. From that revenue history, we get the Year over Year revenue growth. It hung around 400M for 2011 to 2013, then in 2014 sales grew by 900M. Using that history, I assumed revenue growth of 500M through 2019. I knocked 2015 revenue growth to 0 to account for the sales impact of the E. Coli outbreak.

Next we estimate shares outstanding which has been holding around 31M for the past 5 years. I held the same values through 2019.

With Sales and Shares Outstanding estimated, we can calculate Sales/Share.

Next we calculate Price per Sales (P/S) by taking the price per share each year and dividing that by sales per share. The resulting P/S ratio is about 5 most years. I held the same ratio through 2019.

P/S * assumed sales gives us an estimate for stock price for the years we estimated. To be conservative, hack that in half by 50%. That gives you the target sales price.

This analysis resulted in a target price of $412. CMG is currently trading at $452.05. Close enough, that's the last information I needed to pull the trigger.

This purchase was funded with proceeds from a well timed INTC buy/sell based on the insightful article at  Ed's Stock Engineering