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The Chipotle Mexican Grill that opened late last month just north of Yonge and Eglinton is the company's second restaurant in Toronto - and in all of Canada. It joins a location farther south on Yonge Street that opened in 2008.

That glacial pace of expansion threatens to mislead Canadians: Chipotle Mexican Grill is actually the premier growth story among American restaurant stocks, providing investors a rapidly expanding store base and industry-leading sales gains at its existing stores.

As a result, Chipotle is also one of the most richly valued restaurant stocks, making some analysts who follow the company temper their praise with this caveat: You may have to wait for a dip to get in on this spicy story.

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"We continue to believe Chipotle represents the strongest 'growth' story in an otherwise maturing restaurant industry, with customer loyalty unmatched," said Jeffrey Bernstein of Barclays Capital. That, however, is "fully reflected in [its]current valuation. Await [a]better entry point."

The gourmet burrito chain grew quickly from a Denver startup to a subsidiary of McDonald's Corp. during the period the fast-food behemoth was diversifying into other concepts. When McDonald's decided to divest itself of its smaller chains, it created one of the hottest initial public offerings of 2006. The stock doubled in its first day of trading and increased sixfold in its first two years.

Today, it's a leader in the "fast casual" category, where menu prices and quality exceed the major fast-food chains. Chipotle markets its simple menu of burritos and tacos as "food with integrity" - much of the pork, chicken and other meats are sourced through farming and ranching operations that avoid antibiotics and added hormones.

At the close of 2009, Chipotle was fighting back from lows that had erased nearly all of its stupendous gains since its 2006 IPO. Analysts at Morgan Stanley argued that pessimism about the chain's earnings, margins and sales had taken away a valuation premium Chipotle deserved for its best-in-class growth.

Chipotle's performance, particularly in the second quarter, silenced the critics. For the three months ended June 30, Chipotle reported same-store sales growth - revenue at locations open at least one year - of 8.7 per cent, double the first quarter's 4.3 per cent and well ahead of analysts' expectations. As part of the earnings announcement, management raised same-store sales guidance, previously in the mid-single digits, to mid-high single digits.

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Analysts noted that the gains are coming almost entirely from increased store traffic, as Chipotle hasn't increased menu prices, and doesn't plan to this year.

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At the same time, Chipotle continues an ambitious store-expansion program. The company had 1,001 stores at quarter's end, and remains on track to open roughly 120 to 130 restaurants in 2010.

The key to the Chipotle growth story is whether those gains are as sustainable as its farm-raised meats. The Morgan Stanley analyst team believes Chipotle has reached only 40 per cent of its saturation point in the United States, and can at least double its current store base.

International growth, such as in Canada, is in its infancy. Chipotle's only other non-U.S. location is in London, with a Paris site planned for 2011. Spokesman Chris Arnold says that reflects Chipotle's lack of brand awareness outside the United States, as well as not having an established supplier network. "Our aim in some of those [international]markets is to grow smartly, rather than grow really fast to our detriment."

Investors who bet on Chipotle early this year have been richly rewarded, with the stock up nearly 70 per cent so far in 2010. Still, the shares have a price-earnings ratio in the mid-to-high 20s, depending on whether the "earnings" is the last 12 months or the typical analyst estimate for 2011, with earnings approaching $6 a share. Mr. Bernstein, of Barclays Capital, says Chipotle's price-earnings ratio has ranged from 16 to 59 in the past three years, with an average of 31.

The hazard is whether any little disappointment will send momentum investors scurrying. Margin expansion has been slowing, and while the company says it can maintain margins through store-level cost management, many analysts expect rising food and labour costs, and continued higher marketing spending.

Mr. Bernstein says it is "very difficult to support a bear case scenario for the shares of Chipotle" based on its sales performance. "But if one was needed, other than valuation concerns," it is deceleration in margin expansion and the earnings-per-share surprises that come with it: Chipotle reported only about 5-per-cent upside to Wall Street EPS estimates in the current quarter, down from the consistent 25-per-cent upside reported over the past four quarters, he said.

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