Is Chipotle’s Stock Rally Over?

CMG: Chipotle Mexican Grill logo
Chipotle Mexican Grill

[Updated 12/24/2020] Chipotle Update

Having gained more than 70% in 2020, Chipotle Mexican Grill’s stock (NYSE:CMG) has reached its near term potential. CMG’s stock has rallied from $837 to $1418 in 2020 compared to the S&P 500 which moved 14% in the same period. The company has seen a high revenue growth over recent years, and its P/E multiple has also risen steadily. We believe the stock, after the recent rally, is at its near term value. Our dashboard Buy or Sell Chipotle’s Stock has the underlying numbers.

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Despite the Covid-19 crisis, Chipotle saw its revenue grow in the first 3 quarters of 2020 primarily due to its seamless transition to Digital Sales. The company’s investment in digital over the past few years paid off as the pandemic forced restaurants to operate more on take-away and delivery mode. In Q3 2020, Chipotle beat consensus estimates for revenue recorded at $1.6 billion, up 14% y-o-y and earnings recorded at $2.87 compared to $3.55 in the same period of the previous year. The fall in EPS was due to higher operational expenses during the pandemic. Further, the company reported $2.6 billion in cash inflows from operating activities for the first nine months.

We expect Chipotle’s revenues to grow by 9% to $6.1 billion for 2020. Further, its net income is likely to grow to $577 million. Thereafter, revenues are expected to grow further to $7 billion in 2021. In addition, the EPS figure is likely to improve to $26.35, which coupled with the P/E multiple of 54.5x will lead to Chipotle’s valuation around $1437, in line with the current market price.

[Updated 06/05/2020] Chipotle – Too High To Buy?

At a price of $1,042 on June 4th, Chipotle Mexican Grill’s stock (NYSE:CMG) has fallen slightly from its all time high on 2nd June, 2020. This is after the company posted a positive revenue growth of about 7.8% with a comparable sales increase of 3.3%. The impact of pandemic was felt as the comparable sales in March dropped by 16%. But the stock has risen exponentially since the results despite the Covid-19 impact primarily due to its seamless transition to digital sales, particularly delivery. Digital sales more than doubled last quarter and are now approaching 40% of the chain’s business. Despite the fact that the stock is rising, we believe Chipotle is now overvalued. Why is that? The key is the company’s revenues are expected to fall due to the pandemic in Q2 and its margins are being weighed down by the increasing digital sales (Operating margin fell by 340 basis points in Q1 2020).

The stock price gain from $289 at the end of 2017 to $1055 at the end of 2019 is justified by a nearly 25% increase in Chipotle’s revenues from 2017 to 2019 (primarily due to higher stores and higher comparable sales). This was accentuated by an increase in Net income margin from 3.9% in 2017 to 6.3% in 2019. As a result, the net income figure rose from $176 million in 2017 to $350 million in 2019. The rise of 103.9% in EPS was also helped by a reduction of 2.6% in shares outstanding.

The rise in EPS was combined with an increase in CMG’s P/E multiple, which went up from 46x at the end of 2017 to 66x at the end of 2019.This reflects a 42% increase in the multiple fromthe  end of 2017 to the end of 2019. The multiple has gone up to 82x currently. This reflects an overall 76% increase in the multiple from the end of 2017 to June 2020.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. Despite that, CMG’s stock is up by about 20.7% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 3.5%. Moreover, more than 95% of CMG’s total revenue comes from the US region, which is currently the worst-affected country. Many restaurants are closed, while some are running in a takeout-only mode. And lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages. These factors are bound to hurt CMG’s revenues and we saw comparable sales fall by 16% in March. The company’s margins are also being weighed down due to higher digital and delivery cost.


The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.

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