Chipotle Mexican Grill (NYSE:) operates and manages its namesake Chipotle Mexican Grill restaurants.

According to the latest filings of the company, there are currently 2,808 Chipotle locations in the United States and 41 Chipotle international restaurants. A consolidated entity in which the company invests includes four Pizzeria Locale pizza restaurants.

Chipotle’s concept of “real food made with fresh ingredients” has been a huge success, as the company has expanded its international footprint in the last few years.

The company’s revenues have increased dramatically and so has its net income. With many international expansion opportunities ahead, the company’s future looks bright. However, the shares are traded at a premium. This is why I’m neutral about the stock. (See CMG stock charts on TipRanks)

Robust Growth Prospects

Chipotle’s latest quarterly results once again showcased the company’s ability to retain exceptional growth metrics.

Revenues grew by 38.7%, to $1.9 million in Q2. Chipotle also opened 56 new locations, compared to five closings. It continued its expansion.

However, the largest growth driver was Chipotle’s comparable-store sales which increased by 31.2% annually. Similar-store sales are a strong indicator of consumers’ love for Chipotle and the food it serves. This should be a positive signal for Chipotle in expanding into new markets.

Digital sales increased 10.5% to $916.5million, which is 48.5% of the total sales. Rest were order-ahead orders, which indicates that both customers and Chipotle appreciate the convenience of online ordering as well as Chipotlanes’ added value.

However, it is important to remember that while online sales increase, similar sales growth should also remain strong, since they allow for increased operational efficiency as well as better order management.

Chipotle’s profitability is also growing, because its business model allows for high scaling. Over the last five years, gross margins increased from 30% to 40% to about 10% to approximately 10%. Net margins have also grown from borderline negative to almost 10% over that same time period. The company will open more restaurants, expand its supply lines, and increase operations. Net margins are expected to continue growing.

Valuation

While Chipotle’s growth has been exciting, and will likely continue to be impressive, shares are rather pricey.

The forward price/earnings ratio for the stock currently stands at 57.4. Chipotle trades at a premium historically, and its earnings growth has allowed it to justifiably justify that price.

However, the margins of safety for investors has been eroded by an increase in premiums.

Ackman’s Equity Stake

Many of Chipotle’s investors may be unaware, but legendary investor Bill Ackman, who manages the holdings of Pershing Square (PSTH), holds around 3.86% of the company’s shares.

Ackman’s contribution to Chipotle’s remarkable success has been a strong one-year commitment. Pershing Square has seven publicly-equity stock holdings.

This does not alter the fact that Chipotle stock is overpriced. However, it is encouraging to have such an accredited investor committed and onboard.

Wall Street’s Take

Turning to Wall Street, Chipotle Mexican Grill has a Moderate Buy consensus rating, based on 17 Buys, and seven Holds assigned in the past three months. At $1,902.19, the average CMG price target implies 1.1% upside potential.

Disclosure: Nikolaos Sismanis had no position at the time this article was published.

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