What I learned in class today: Investing in Chipotle

What I learned in class today: Investing in Chipotle

This semester I’m taking Introduction to Business with Professor Aronhime primarily because I’ve recently been considering minoring in Entrepreneurship and Management. E&M, a minor in the Whiting School of Engineering, is one of the most popular minors on campus and exposes students to a wide array of classes designed to equip them to lead in business, professional, and academic arenas. All of this is not to say that I will definitely pursue an E&M minor, rather I’d like to experience the world of business and Intro to Business seems like a perfect way for me to do this.Impress-InvestorsTo students who are interested in taking Introduction to Business, be warned – the class is writing intensive. This is something I may have overlooked when I enrolled, but have somehow managed to keep up with the many memos and papers that we have had to write. A couple classes ago, we talked about value investing. Essentially, value investors look for stocks that are trading for less than their intrinsic values and then decide whether or not to invest in them. This may seem ambiguous, but I’ve learned that there are many qualitative and quantitative analyses one can use to determine whether or not a company is undervalued and ultimately whether or not they should be investing in it. Investors make a lot of money from doing this alone, and I am surprised that there aren’t many more of them. I have included an excerpt from a paper I wrote (removing some mathematical jargon) for Introduction to Business about whether or not Chipotle would be a profitable investment.

Chipotle: Risky Business?

Who doesn’t love Chipotle? The Mexican Grill with over 1,200 restaurants worldwide offers savory, yet healthy, food for relatively cheap prices. More importantly, it combines the speediness everyone appreciates about fast food restaurants with the tastefulness everyone loves about fine-dining. While customers may love everything about Chipotle, I learned that some investors say that now is terrible time to invest in the company especially considering its recent involvement with faulty food sanitation. However, after investigating and analyzing Chipotle’s specs I’ve found that the franchise may in fact be undervalued which would mean that now would be a good time to invest in the company. In the proceeding paper, I will be providing both a qualitative and quantitative analysis of Chipotle to show not only why I think it may be undervalued but also to support my claim that if this is so, why the franchise would be an opportune investment.6358851058574255301073699047_imageEven though in the past couple of months Chipotle has been under inspection due to its methods of food preparation and for outbreaks of E.Coli and Norovirus, the restaurant has a great overall brand and is actively working to fix the health issues it may have caused; therefore, the franchise isn’t going anywhere. By this I meant that the multimillion dollar food company is not going to let a bad batch of lettuce or meat result in its filing for bankruptcy any time in the near future. To add, Chipotle has recently started working with Burson Marsteller a renowned communications and relations firm through which it plans to enact several food-safety procedures and fund a multimillion dollar marketing campaign in order to ultimately increase its quarterly and annual earnings; the company is headed in the right direction. Similarly, as mentioned previously, the fast casual restaurant industry is on the rise due to both it’s efficiency and sophistication, so it’s likely that Chipotle will be frequented by many customers in the months to come.

It wouldn’t mean much that people enjoyed going to fast casual restaurants and eating the food Chipotle offered if the economy overall was not doing so well. This is because people are willing to spend money only when they feel confident about their financial situation. In order for society to feel confidence, the economy has to be on the rise. Fortunately for Chipotle, while the economy has seen better days, it is not in a state of recession and it does not appear to be approaching one. In fact, a quick analysis of the graph for the Dow Jones Industrial Average over the past three years has shown that the economy is progressing. From the aforementioned qualitative analyses of both Chipotle’s traits and the current economic climate, I believe there is sufficient information to show that Chipotle as a company will thrive in the coming years.Chipotle_Barbacoa_Bowl_2xHowever, a qualitative analysis alone is not sufficient to prove Chipotle’s profitability. On the quantitative side of the matter, things are also looking good for the franchise. Namely Chipotle’s calculated price to earnings, inventory turnover, and overall earnings per share ratios have all been favorable since 2014. In 2014, Chipotle’s price to earnings ratio was at 52.87 and in 2015 it dropped to 33.88. This 19-unit drop suggests that less money needs to be invested in chipotle for a dollar profit to be made and this is likely a result of the company being undervalued. Similarly, for Chipotle, from 2014 to 2015, the inventory turnover rate increased from 210.78 to 219.06. This increase of around 8 units, while by no means a very large, illustrates that over time Chipotle has been increasing sales, most likely due to an increase in demand for Chipotle over the years. Lastly, in 2014, Chipotle’s earnings per share were $14.13 and in 2015 the value increased to $15.10. While minimal, this net increase of $0.97 suggests that Chipotle is making more money and thus heading in a good direction.

To an investor, the trends in these ratios are somewhat favorable. Collectively, the decrease in the price to earnings ratio and the increases in the inventory turnover rate and the earnings per share show that currently, Chipotle may be undervalued, suggesting that if invested in its share price will rise and that a profit will be made. Right now, the cost for one share of Chipotle is $524.29, which is higher than most stocks. The company has a 52-week high of $758.61 and a 52-week low of $399.14, respectively most likely over and undervaluations. Since it is beneficial to buy low and sell high, and the current stock price is closer to the 52-week low than it is to the 52-week high, it is likely that the share price will go up with time than down. My analysis suggests that an investment in Chipotle at this point in time is favorable from both a qualitative and quantitative perspective. Overall, I believe it is Chipotle’s simplistic yet effective business model that attracts customers and this combined with the quantitative analysis makes the company likely to grow over time and that makes it a valuable asset. That being said, the stock price (even at its 52-week low) is rather high and I know I don’t have that kind of money to spend on one stock.

TL; DR: Introduction to Business is fun, and an investment in Chipotle is most likely not as risky as you may think.1024px-Chipotle_Mexican_Grill_logo.svgImage Credits

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  • http://www.chipotlefriendorfaux.com/assets/img/meals/Chipotle_Barbacoa_Bowl_2x.jpg
  • https://upload.wikimedia.org/wikipedia/en/thumb/3/3b/Chipotle_Mexican_Grill_logo.svg/1024px-Chipotle_Mexican_Grill_logo.svg.png
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