Why U should Buy Chipotle ( CMG )

Chipotle Mexican Grill (NYSE: CMG).




The fast-growing burrito chain is trading at a lofty 43 times this year's projected earnings and a still heady 36 times next year's bottom-line target.



Chipotle is cheaper than you think, though. Let's go over some of the reasons why it may still be a good time to buy into the quick-service chain that turned "food with integrity" and a quick-moving queue with a limited menu into the eatery chain that makes most restaurateurs envious.



1. Chipotle is a great play in an economic recovery

There are two good reasons to buy into eateries when a recession passes. The more obvious of the two reasons is that folks have a little more disposable income to use in replacing meals prepared at home with more convenient outings.



Chipotle's latest quarter was a winner, fueled primarily by the uptick in traffic that delivered an impressive 11.4% spike in comps at the individual store level. One can only imagine even healthier lunch traffic as unemployment rates inch lower.



The other favorable component of an economic recovery is that restaurants can begin to inch prices higher. They normally do this in response to the swings of commodity prices, but it's an easier call when folks have more money to spend.



Industry consultancy Intellaprice is showing healthy pricing increases this year, with the average price for lunch and dinner entrees at casual-dining chains climbing 13% and 6%, respectively.



Chipotle has historically been a champ at growing earnings faster than its top line. Net income climbed 40% in the third quarter, outpacing the 23% top-line spurt. Greater pricing flexibility is the ticket to even healthier margins.



2. Estimates are moving targets

If you don't like Chipotle's forward earnings multiples, you would've hated being here three months ago.



After all, analysts see the burrito roller earning $5.45 a share this year and $6.53 a share next year. Three months ago, those targets stood at $5.11 and $6.08, respectively. In other words, based on last night's close of $236.17, Chipotle's profit multiples would be 46 for 2010 and 39 for 2011 based on where Wall Street was perched three months ago.



Ratcheting up guesstimates is part of the art of tracking Chipotle. The chain has landed well ahead of the market's profit expectations in each of the past eight quarters. It hasn't even been close lately.



EPS Est. Diff.

Q4 2009 $0.99 $0.81 22%

Q1 2010 $1.19 $0.95 25%

Q2 2010 $1.46 $1.39 5%

Q3 2010 $1.52 $1.31 16%



Source: Thomson Reuters.



When I recommended Chipotle to Motley Fool Rule Breakers subscribers nearly four years ago at $60, many felt it was overvalued then, too. Well, the stock has gone on to nearly quadruple in that time. What does that tell you?



3. Expansion is just getting started

How big can Chipotle get? The company closed out its third quarter with 1,023 restaurants. It plans to open 135-145 new units next year. Expanding at a double-digit percentage clip can go on for a long time.



There are now more than 32,000 McDonald's (NYSE: MCD) locations throughout the world. Chipotle can't grow that big before saturating the market and cannibalizing sales, but there's clearly room for growth.



Chipotle has just tapped international growth. It recently opened a unit in Toronto and another one in London. We'll see how those trial balloons float.



Chipotle's concept isn't going to be an easy port in many countries. However, who could have guessed that Yum! Brands' (NYSE: YUM) KFC would have been a big hit in China? Weren't Chinese tastes skewing closer to the hometown faves served at Country Style Cooking (Nasdaq: CCSC)?



Oh, and even if Chipotle's namesake concept maxes out its exposure, it does have a trick or two up its sleeve. Last month it announced that it would be testing out a quick-service Asian eatery next year.



Asian cuisine didn't have a lot of success at the chain level a decade or two ago, but the success of P.F. Chang's (Nasdaq: PFCB), Panda Express, and Benihana (Nasdaq: BNHNA) have restaurateurs turning to the Far East for exotic concepts.



Even if that weren't the case, you still have to like Chipotle's chances here. There was nothing exciting about burritos when Chipotle broke ground, but its growth has surpassed the ho-hum performances of Baja Fresh, La Salsa, and Jack in the Box's (Nasdaq: JACK) Qdoba.



In short, Chipotle is at the right place at the right time, with favorable earnings momentum, and plenty of room to grow.



If you still think Chipotle is overvalued, sleep on it for a quarter or two and try to figure out why Chipotle shares get cheaper as they climb higher