After a 19% decline year-to-date (YTD), at the current price of around $1408 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 $1691 to $1408 YTD, slightly outperforming the broader indices, with the S&P falling about 22% over the same period. CMG’s stock decline 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 49x forward price-to-earnings ratio, despite the uncertain macroeconomic environment. This compares to a P/E ratio of 34x for McDonald’s (NYSE: MCD) and 24x for Starbucks (NASDAQ: 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 $2.8 million in Q3, despite adding 43 new restaurants over the same period – illustrating that the additions are not cannibalizing existing locations. In Q3, Chipotle’s revenue grew almost 14% y-o-y to $2.2 billion, on the back of 7.6% growth in comparable restaurant sales. In-restaurant sales grew by 22% largely thanks to the return of onsite diners and digital revenue represented 37% of total sales in the quarter. In addition, the company’s earnings per share rose 28% y-o-y to $9.20 in Q3.
Also, Chipotle saw increased input costs in dairy, packaging, tortillas, and avocados in Q3 2022, but still, the firm’s restaurant margin expanded 180 basis points in the quarter, to 25.3% of sales. This was as the popular tex-mex chain raised its menu prices again in Q3 to push the inflationary cost onto customers, its third time doing so in the past 15 months. In fact, prices went up again in 700 locations at Chipotle in October. Nevertheless, the average price for chicken burrito bowls, which account for 50% of orders in the U.S., still remains below $9.
We have updated our model following the Q3 release. We forecast Chipotle’s Revenues to be $8.8 billion for the fiscal year 2022, up 16% y-o-y. Looking at the bottom line, we now forecast the earnings per share to come in at $32.64. Given the changes to our revenues and EPS forecast, we have revised our Chipotle’s Valuation to $1509 per share, based on a $32.64 expected EPS and a 44.9x P/E multiple for the fiscal year 2022 – almost 7% higher than the current market price.
In the fourth quarter, management expects comps to rise by mid-to-high single-digits. For the full year 2022, it counts on opening 235 to 250 new restaurants, with 255 to 285 coming in 2023. The company reiterated its long-term goal of having 7,000 locations running in North America, more than double the 3,000 stores Chipotle operates today. Furthermore, annual unit sales are expected to exceed $3 million in the future. As far as revenue growth is concerned, Chipotle still has considerable room to grow by expanding its store count. It shouldn’t be forced to raise prices entirely to accomplish growth. An increase in store count and store volume should also certainly improve the company’s prospects. 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.
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.
With inflation rising and the Fed raising interest rates, Chipotle stock has fallen 19% this year. Can it drop more? See how low can CMG stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||-5%||-23%||64%|
|Trefis Multi-Strategy Portfolio||-4%||-25%||196%|
 Month-to-date and year-to-date as of 11/3/2022
 Cumulative total returns since the end of 2016
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