I have written previously about how I do not find shares of Chipotle Mexican Grill (CMG) very compelling in the 400’s and recently we learned that Pershing Square’s Bill Ackman has taken a near 10% stake in the company. This move seems odd to me for a couple of reasons. First, the restaurant business is pretty straightforward, so it is unlikely Ackman engaging with CMG’s board is going to result in a dramatic strategic shift or business model pivot. I guess they could start franchising units, but that’s hardly a bombshell idea.

Second, and even more importantly from an investing standpoint, is the price Ackman is paying for a restaurant chain. At roughly 3 times this year’s projected sales of $4 billion, investors in CMG at current prices are not getting a very good deal. Before the company’s health-related issues, CMG was earnings a very impressive 21% Ebitda margin. The owned unit restaurant industry (as opposed to franchising-based) typically fetch about 8 times EBITDA in the public markets. Some quick math tells us CMG should trade around 1.7 times annual revenue. And that is before operating expenses increase due to new food safety procedures that CMG has now implemented. As a result, it is quite possible that the “new normal” for CMG is an EBITDA margin of less than 20%.

Many fans of Chipotle would likely argue that the company should trade at a premium valuation to the industry due to below-average build-out costs, above-average unit economics, and a reasonably loyal customer base. Okay, fine. Let’s give CMG a 50% premium and say it is worth 12 times EBITDA instead of 8 times (too high in my mind, but at least the case can be made). Even at the company’s old margin levels, investors would value CMG stock at 2.5 times annual sales, or about 15% below current levels.

It is really hard to see how Ackman sees this investment playing out, or how he thinks he can really move the needle by speaking with management. Customers are going to have to come back in droves to justify CMG shares trading at $500 or $600 per share. I love their food, but color me skeptical.

Full Disclosure: No position in CMG at the time of writing, but positions may change at any time