Chipotle is tastier than Yum! Brands' Taco Bell after all, it seems. Always-in-the-headlines hedge fund guru David Einhorn's assertion that Taco Bell's Cantina Bell line of burritos was stealing customers from Chipotle turned out to be nonsense. When the company reported earnings last Friday, same-store sales were up an impressive 6.2%, beating analysts' expectations for 4.7%. Shares soared a whopping 16% on Friday, closing at an all-time high at about $510.

Sunny days ahead
Though Chipotle actually missed EPS guidance, reporting per-share profits of $2.66, short of analysts' estimates for $2.78, it also had plenty of encouraging metrics for investors and analysts to drool over. Same-store sales were up higher than expected, driven by increased foot traffic, and revenue was up 18% from the year-ago quarter, beating analysts' estimates by a fraction of a percent.


But the most significant source of investor optimism was probably Chipotle's major revision to its guidance, expecting full-year comparable restaurant sales to be in the mid-single-digit range. Before, management expected full-year same-store sales to be in the low to mid-single digits. With first- and second-quarter same-store sales of 1% and 5.5%, respectively, Chipotle will have to post comparable restaurant sales of about 5% or greater in the fourth quarter to land in this range.

Challenges
Though demand for the company's food is as robust as ever, Chipotle will have to overcome a few challenges next year. Particularly, Chipotle plans to raise prices anywhere from 3% to 5% to compensate for increased food costs as the restaurant continues its transition to non-genetically modified, or non-GMO, ingredients. Furthermore, Chipotle's operating margin seems to have peaked.

CMG Operating Margin TTM Chart

CMG Operating Margin TTM data by YCharts

In the third quarter, the company's operating margin contracted to 26.8% from 27.4% in the year-ago quarter. If the company's transition to non-GMO products continues to pressure its operating margin, year-over-year EPS comparisons may become increasingly difficult. Notably, however, Chipotle's operating margin is faring fairly well thus far, considering its transition to non-GMO products and rising costs for corn, tomatoes, salsas, dairy, and chicken.

Finally, Chipotle must live up to borderline euphoric expectations. Now trading at about 5.5 times sales and approximately 40 times forward earnings estimates, the stock has an awesome growth story that's largely priced into the stock.

YUM Price / Sales Ratio TTM Chart

YUM Price / Sales Ratio TTM data by YCharts

When compared to Yum! Brands' not-so-healthy alternatives -- KFC, Pizza Hut, and Taco Bell -- Chipotle looks incredibly expensive. Not only does Yum! Brands provide investors a small (but still meaningful) dividend yield of about 2.2%, but it also trades at less than half Chipotle's price-to-sales ratio, at just 2.3. Or, another way to compare valuations: Yum! Brands has a far more conservative price-to-forward earnings estimates ratio of 17.5. 

No matter how much investors love a company's food or admire its efforts to be socially responsible, price still matters. After Chipotle's massive 16% jump, a very optimistic outlook is already priced into the stock. Though the company's third-quarter earnings may have provided incrementally greater confidence in the company's future, investors just added another $2 billion to the company's $13.5 billion market capitalization in just a day's time.

Despite the great quarter, the stock's gain left no room for buying opportunities.

Why Yum! Brands may have more durability than you might think
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The article Chipotle's Stock Just Keeps Soaring originally appeared on Fool.com.

Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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