David Trainer argues Chipotle's stock is overvalued, citing $2.6 billion in off-balance-sheet debt and same-store sales that decline when you exclude newer locations. The current price assumes margins will triple and revenue will grow 10% annually for 15 years, which he calls unrealistic.
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Shares of Chipotle up nearly 25% so far this year, near 52-week highs right now. The company is reporting quarterly numbers after the bell tonight.
So does Chipotle have more room to run or has the stock gotten too hot? Joining us to debate this one is Stephen Anderson from the Maxim Group and David Trainer from New Constructs. So, David, I'll start with you. You're the bearish one. The company has been working really hard to turn itself around from the food safety scandal. Also raising menu prices. Analysts are looking for a double-digit percent gain on same-store sales. Why are you still bearish?
Well, I think people overlook a couple of things. First of all, the valuation is much more expensive than you think because there's $2.6 billion of off-balance sheet debt that most analysts don't take into account. In addition, when you look at same-store sales, those numbers are overstated because they're including new stores. If you keep the comps just to stores that have been open for more than a couple of years, there's actually a pretty significant decline going on. So they're juicing the numbers a little bit here, and that's never a good thing, especially with a company with a track record like Chipotle. All right. We should point out, Stephen, you have a hold on the stock. There are 35 analysts who cover the company. 7 have buys and they weren't available. But we're glad you could be with us today. But what do you say to David and his thoughts on, like, for example, same-store sales and the comparisons to previous years? When they're really suffering?
Well, one of the reasons we upgraded the stock recently to a hold is that we take a look at the 2-year stacked comp sales. That's this year's sales on top of last year's sales. And what we've seen is an acceleration from a -19%, -20% level to about a -11%. And that improvement alone, I think, justifies us to have an improved outlook on the company. And more importantly, these sales are being done at higher margins than they were taken last year. If you recall, throughout much of 2016, the company had to do a lot of buy one get one offers, a lot of free burrito coupon promotions. Not the case this year. And it was mentioned just earlier, they are taking menu price increases in select markets. And I think having the confidence for them to do that will enable them to see the margins, particularly in markets where labor costs are a bit higher.
So, David, I'm wondering if you can read anything into the McDonald's results today. Very strong, especially in the US, 1.7% same-store sales. I wonder if that's McDonald's taking share from companies like Chipotle, or if it's the overall restaurant industry recovering from what was a recessionary kind of period.
McDonald's has been taking share from other restaurant companies for decades. And when it comes to a stock like Chipotle, we're not saying it's a bad company. We're just saying the valuation already implies tripling of margins and 10% compounded annual growth in revenues for nearly 15 years. There's better stocks out there. I think that's the takeaway. And McDonald's is one of them. All right. We got to go, guys. We'll know. What the report card looks like on Chipotle when we get to the next hour here. Stephen Anderson, David Trainer, thanks for joining us.
