Up 30% This Year, Will Chipotle Stock Rally Further Following Q3 Results?

-17.61%
Downside
2569
Market
2117
Trefis
CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

Chipotle Mexican Grill stock (NYSE: CMG), a fast-casual restaurant chain that focuses on fresh and organic ingredients in burritos, salads, and more, is scheduled to report its fiscal third-quarter results on Thursday, October 26. We expect CMG’s stock to trade higher due to revenues and earnings beating the expectations in its third-quarter results. Chipotle’s growth is slowing, but still, its profitability is holding up well – thanks to raised prices. The company’s management highlighted that it saw elevated costs across the board in Q2, most notably in beef, tortillas, dairy, salsa beans, and rice. That said, the company’s balance sheet remains strong at $1.8 billion in cash, restricted cash, and investments, with no debt. It opened 47 new restaurants in the second quarter of which 40 had a Chipotlane (drive-thru) and it remains on track to open between 255 and 285 new restaurants this year with at least 80% including Chipotlane. CMG’s positive performance so far can be attributed to restaurant-level operating margin expansion, menu innovation, price increases, and good execution of the company’s digital strategies.

Going forward, Chipotle expects comps in a low to mid-single-digit range driven by transaction growth in the upcoming third quarter. It continues to forecast full-year comps in the mid-to-high single-digit range. For Q3, CMG expects the cost of sales to be around 30% due to higher beef and avocado prices. CMG’s supply chain team has been diversifying its avocado exposure, and in the third quarter, the majority of the avocados are expected to come from Peru. While prices are higher than the very favorable levels in the second quarter, still the company is less impacted by the volatility in the Mexican avocado market.

CMG stock has shown strong gains of 30% from levels of $1385 in early January 2021 to around current levels, vs. an increase of about 10% for the S&P 500 over this roughly 3-year period. However, the increase in CMG stock has been far from consistent. Returns for the stock were 26% in 2021, -21% in 2022, and 31% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 10% in 2023 (YTD) – indicating that CMG underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CMG face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

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Our forecast indicates that Chipotle’s valuation is $2117 per share, which is almost 15% higher than the current market price. Look at our interactive dashboard analysis on Chipotle Earnings Preview: What To Expect in Q3? for more details.

(1) Revenues expected to rise above the consensus estimates

Trefis estimates Chipotle’s Q3 2023 revenues to be around $2.5 Bil, slightly ahead of the consensus estimate. Chipotle saw 14% y-o-y growth in revenues in Q2 to $2.5 billion, as comp sales grew 7.4% with over 4% transaction growth. For the full year of 2023, we forecast Chipotle’s Revenues to be $9.8 billion, up 14% y-o-y.

The company’s management thinks there could one day be 7,000 Chipotle locations in North America, up from about 3,100 as of now. Moreover, Canada only has 28 Chipotle restaurants, and the expansion potential is significant. There are also 12 restaurants in the UK, as well as a few takeout-only restaurants in France and Germany. The expansion will probably continue for a long time if its concept is successful with other cultures.

2) EPS is also likely to beat consensus estimates

Chipotle’s Q3 2023 earnings per share (EPS) is expected to come in at $11.02 per Trefis analysis, marginally beating the consensus estimate. In Q2, Chipotle’s restaurant-level margin of 27.5% increased by about 230 basis points compared to last year. This helped adjusted diluted earnings per share soar 36% y-o-y to $12.65 over the same period. The second quarter had unusual expenses related to corporate restructuring and corporate and restaurant asset impairments, including the closure of Pizzeria Locale. It should be noted that 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.

(3) Stock price estimate higher than the current market price

Going by our Chipotle Valuation, with an EPS estimate of around $44.45 and a P/E multiple of 47.6x in fiscal 2023, this translates into a price of $2117, which is 15% higher than the current market price. That said, the company’s stock appears cheap at the current time. Chipotle’s steep valuation is higher than other popular restaurant stocks like the 27x P/E ratio for McDonald’s (NYSE: MCD) and 29x for Starbucks (NASDAQ: SBUX).

It is helpful to see how its peers stack up. CMG Peers shows how Chipotle’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

 Returns Oct 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 CMG Return -1% 31% 382%
 S&P 500 Return -2% 10% 88%
 Trefis Reinforced Value Portfolio -3% 19% 514%

[1] Month-to-date and year-to-date as of 10/24/2023
[2] Cumulative total returns since the end of 2016

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