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Sometimes a burrito is just a burrito
March 11th, 2014

Recent economic news has been on the weak side. I’ve continually talked about the weather as a factor; some may think it is an excuse and others may understand.

My feeling is come spring, we will start to see some pent-up demand and economic activity will increase more than many expect. An area that could bring up the GDP to the 4 percent range is housing, and not because housing is going to have some big price boom, but simply because of supply-demand factors.

Back in the late 1990s and the turn of the 21st century, homebuilding was hot, but rising faster than demand, and overbuilding contributed to the housing bust.

Well, here we are in 2014, and things have changed. The number of unsold homes, compared with the inventory of homes for sale, along with the decline in the homeowner vacancy rate, has changed the dynamics of supply-demand.

Simply put, the population has continued to grow and not enough houses have been built to meet the demand. Also, new homes create money in the economy because they are leveraged. Also, new-home buying generally means other purchases, such as washers, dryers, curtains and so on.

So worst-case scenario, I may be early to the party, but I know the party will happen soon. Don’t miss it by being in bonds or CDs — good valued stocks will be the best place for investors.

OK, what is up with Chipotle Mexican Grill (NYSE: CMG) pushing the $600 level? Investors, this is a restaurant, not some high-tech company where the growth is unmatchable.

Read the business summary for this company and you will see it is very short. The summary says it develops and operates fast, casual and fresh Mexican food restaurants. It offers burritos, tacos, burrito bowls and salads. It operates 1,500 restaurants and was founded in 1993.

Based on the mean of 26 analysts, the company is expected to earn $15.98 for the year ending December 2015. This is up nicely from the $12.91 for the year ending December 2014 and $10.47 for the year ending December 2013. Based on the December 2015 earnings per share of $15.98 and a stock price of $600 per share, investors are paying 38 times forward earnings for a fast-food restaurant that makes burritos.

I have eaten there and, yes, their burritos are good, but in my opinion, there is nothing that drives me to keep going back there because they are that special.

There are some positives on the company, but it still doesn’t justify the expensive stock price. Over the last 12 months, sales increased 17.7 percent — that’s more than three times the industry average of 4.2 percent. Earnings per share also look very good, increasing 19.8 percent when the restaurant industry experienced a decline of 15.7 percent.

The balance sheet is strong with the company having no debt on its balance sheet and a current ratio of 3.3 — well above the industry average of 1.10. A closer look into the liquidity of the company revealed that it has $578 million in cash and short-term investments, along with $313 million in long-term investments.

Chipotle also has a good return on equity of 23.5, which is just below the industry average of 25.5. The profit margin for Chipotle looks good at 10.2, which is better than the industry at 8.8 percent.

So let me just do a quick comparison to Apple (Nasdaq: AAPL) computer to see what you think. Apple trades at 11.5 times forward earnings, which is less than one-third of Chipotle, and Apple pays a 2.3 percent dividend while the burrito restaurant pays none. Cash and investments both long and short are just below $900 million for Chipotle, while Apple checks in at $159 billion (the entire market value of Chipotle is $18.4 billion.

The earnings per share for Apple are expected to grow only by 8 percent year over year, while Chipotle is looking at nearly 24 percent in EPS growth.

But smart investors who are concerned with protecting their capital will ask how many burritos the company will have to keep selling to maintain such a high growth rate. And again, it is just a burrito — there is no way to make it better or improve the speed or anything else. It will always be pretty much the same burrito.

Those who buy Chipotle stock and someday lose money will say the stock market is risky. Those who invest in Apple looking for a good return will say yes, the stock market is a crazy place, but there are some good investments to be made by the smart, patient investor.

Have a question or a company you'd like me to take a look at? Email me atbrent@wilseyassetmanagement.com.

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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