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Chipotle's IPO

Burrito chain ready to serve up 'hot' stock

Published January 26, 2006 at midnight

NEW YORK - Sizzling like a fajita burrito, Chipotle priced its initial public offering at $22, a 33 percent jump over its original estimates and $2 more than Monday's projection.

The rapidly escalating price could push today's offering to nearly $200 million and make Chipotle a company worth at least $700 million.

But that's this morning. By the time you read this, the stock could be heading even higher.

Today's first day of trading - under the symbol CMG on the New York Stock Exchange - likely will demonstrate the significant demand for stock in the Denver-based Mexican food chain, which has been owned by McDonald's and its executives since 1999.

Analysts are rushing to predict the proper amount of seasoning for the stock sale. Scott Reeves, a columnist for Forbes magazine, predicted last week it "will be spicy, but not hot."

But more forecasters seem to side with Prudential Equity Group analyst Larry Miller, who said, "On a scale of mild, medium or hot, we think the Chipotle IPO could be 'hot' based on its healthy fundamentals and future growth prospects."

Buckingham Research Group initiated coverage Wednesday night with a "strong buy" and a target price of $36, saying Chipotle "should be considered a top restaurant stock pick . . . at any price below $30."

McDonald's will sell some of its Chipotle shares, raising up to $66 million before expenses. It'll own 65 percent of the company and have 87 percent of the votes.

The remainder of the shares will raise roughly $133 million, before expenses, to help the burrito chain keep growing.

Chipotle had only 14 restaurants in 1998 but expanded to 177 by the beginning of 2002. Then the explosion occurred: Chipotle opened 57 stores in 2002, 76 stores in 2003, 104 stores in 2004 and 80 stores in 2005.

It plans to open between 80 and 90 stores in 2006.

Buckingham Research Group "believes long-term potential of 2,000 plus units is achievable."

Chipotle's reputation on Wall Street is boosted, perhaps, by the performance of its Manhattan locations. The two-story restaurant at East 44th Street and Lexington Avenue boasts many features long familiar to Denverites, including the chrome and wood decor, eclectic music selections and, especially, the distinctive spicy smells.

Wednesday night's crowd, however, was more focused on choosing between pinto and black beans than on calling their brokers.

Hannah Chung, who said she eats at the Chipotle at least once a month, was unaware of the IPO.

"I eat here because of the fresh ingredients, and it's reasonably priced and in the neighborhood," she said.

She's one of millions of burrito buyers. For the first nine months of 2005, Chipotle reported $454.4 million in revenue, up 32.4 percent from 2004. Net income before income taxes was $22.6 million, up 130 percent from the year before.

Investing in Chipotle

THE PROS:

Growth: Want a hot restaurant concept? Chipotle opened 237 stores from 2002 through 2004, 80 stores in 2005 and plans to open 80 to 90 stores in 2006. But that still will put the chain below 600 locations, well below the thousands of stores that more mature restaurant chains operate.

• McDonald's: Chipotle isn't figuring it all out on its own. Fast-food pioneer McDonald's bought a minority interest in 1998 - when the company had only 14 locations - and grabbed a majority stake in 1999. Two of Chipotle's top four officers have a combined 48 years' experience at the burger giant.

• Demand: Investors are always told, "Invest in companies you can understand." And with lines snaking out the door at Chipotles across the U.S., a lot of people are driving by the restaurants wondering how they can get a piece of a super-hot business. There are only about 8 million to 9 million shares coming to market today, so there are a lot of investors chasing very few shares.

THE CONS:

• Growth: It's expensive. Chipotle generates positive cash flow, but all that money and more is plowed right back into building more stores. Fast-growing companies also can be difficult to manage - which may result in more earnings surprises than the average public company. Plus, the company's growth rates pop the eyes now - 32 percent gains in revenue and 130 percent gains in profits for the first nine months of 2005 - but how long will diners choose Mexican gourmet food you can eat with your hands?

• McDonald's: Chipotle gets sweet deals from vendors such as Coca-Cola on down to the 401(k) plan provider that runs McDonald's retirement plan. Some of the pricing will continue after the IPO, but as McDonald's reduces its ownership, some of the arrangements will expire, driving up Chipotle's costs. In the meantime, McDonald's owns supervoting shares that give it 87 percent control with just 65 percent ownership. That's gristle on the burger for corporate-governance experts.

• Demand: Rare is the IPO that sustains the hoopla, hype and ballyhoo of its first day, when investor hopes are highest. Buying today - or worse, tomorrow - gets you in at a price where a long-term return can be challenging.

David Milstead is finance editor of the Rocky Mountain News. He can be reached at or 303-892-2648.

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