At $1400, There’s Upside For Chipotle Stock

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CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

After a 15% decline over the last six months, at the current price of around $1402 per share, we believe Chipotle Mexican Grill stock (NYSE: CMG), a fast-casual restaurant chain that focuses on fresh and organic ingredients in burritos, salads, and more – could see more gains. CMG stock has declined from around $1643 to $1402 in the last six months, largely underperforming the broader indices, with the S&P falling about 9% over the same period. CMG’s stock declines can be attributed to investors’ concern about rising costs and their effects on the company’s bottom line. It should be noted that CMG shares are still trading at a premium valuation of 48x forward price to earnings ratio, despite the recent sell-off. This compares to a P/E ratio of 27x for McDonald’s (NYSE: MCD) and 21x for Starbucks (NYSE: SBUX). In this note, we talk about why we think Chipotle’s business is worthy of such a premium.

To begin with, Chipotle has remarkable store economics. Its average restaurant sales rose 13% year-over-year (y-o-y) to $2.6 million in Q1, despite adding 51 new restaurants over the same period – illustrating that the additions are not cannibalizing existing locations. It continues to post healthy sales and profitability growth in the first quarter, which is a big step in the right direction for the popular Tex-Mex chain. In Q1, Chipotle’s revenue grew 16% y-o-y to $2.0 billion, on the back of 9% growth in comparable restaurant sales (outlets in operation for 13 calendar months at a minimum). In-restaurant sales grew by 33% largely thanks to the return of onsite diners. In addition, the company’s earnings per share rose 25% y-o-y to $5.64 in Q1.

In the fiercely competitive restaurant industry, how does Chipotle stand out?

  • Digital sales continue to be strong at almost 42% of the core food and beverage business in Q1, despite the return of in-person dining. Chipotle’s highest-margin sales are digital orders, so momentum on this front serves the business well for continued profit growth in the long run.
  • Secondly, the company raised its menu prices by 4% in Q1 to push the inflationary cost onto customers, which was on top of another price hike realized in December 2021. This ability to raise menu prices somewhat mitigated the rise in input costs of beef, paper, and avocado during the first quarter. As a result, Chipotle’s restaurant-level operating margin shrank only 160 basis points to 20.7% in Q1, which could have been worse.
  • Thirdly, Chipotle’s reward program (launched in Q1 2019) is gaining steam with an outstanding 28 million members (as of Q1 2022), wherein each purchase wins points that can be redeemed for food. In comparison, Starbucks, which introduced its world-class rewards program more than a decade in advance of Chipotle, has 26.4 million members in the U.S in FQ2 2022 ending April.
  • And lastly, the company’s drive-thru option Chipotlane helps the new restaurants generate sales and margins. As such, out of the 51 new stores that opened in Q1, 42 were built with a Chipotlane.
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We have updated our model following the Q4 release. We forecast Chipotle’s Revenues to be $8.9 billion for the fiscal year 2022, up 17% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $32.02. Given the changes to our revenues and RPS forecast, we have revised our Chipotle’s Valuation to $1538 per share, based on a $32.02 expected EPS and a 48x P/E multiple for the fiscal year 2022 – almost 10% higher than the current market price. That said, the company’s stock appears cheap at the current price.

For Q2 2022, Chipotle is forecasting 10% to 12% growth in comparable restaurant sales assuming current sales trends continue. For the full year 2022, it counts on opening 235 to 250 new restaurants. It should be noted that the company did not provide any profitability estimates. Going forward, if the present inflationary pressures continue to persist, it is likely that the broader markets may see lower levels in the near term. And, a further dip in CMG stock can be used as a buying opportunity for better gains in the long run.

Here you’ll find our previous coverage of CMG stock where you can track our view over time.

While CMG stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Chipotle’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 CMG Return -4% -20% 272%
 S&P 500 Return 1% -13% 86%
 Trefis Multi-Strategy Portfolio 1% -16% 228%

[1] Month-to-date and year-to-date as of 5/30/2022
[2] Cumulative total returns since the end of 2016

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