Chipotle: Is This Stock Still Appetizing After its Q2 Rally?
Chipotle (CMG) has been one of the best performers in the entire market since the COVID-19 bottom. Today, CMG shares are trading for $1830.92, which means that they have more than quadrupled from their $415 lows at the depths of the COVID-19 sell-off in March of 2020. But, this isn’t just a bounce back play in the restaurant sector. Chipotle shares are up 29.7% year-to-date, meaning that they’ve essentially doubled the performance of the S&P 500. With this in mind, it’s clear that investors continue to believe in this company’s long-term growth prospects. Chipotle reported its second quarter earnings this week, which sent the stock rallying higher (CMG shares rose 13.69% this week alone). Therefore, we wanted to take a look at the credible authors tracked by the Nobias algorithm to see whether or not CMG is a “Buy” or a “Sell” after its most recent results.
With regard to Chipotle’s recent rally, Jeremy Bowman, a 4-star rated analyst who writes for The Motley Fool, recently took part in a podcast which discussed the company’s COVID-19 success, focused primarily on its digital transformation. His introduction to the podcast said it all; Bowman wrote, “After its sales initially sank at the start of the pandemic, Chipotle Mexican Grill (NYSE:CMG) turned out to be one of the biggest winners in the restaurant sector thanks to its ability to pivot to digital and delivery, the expansion of its drive-thru concept, Chipotlanes, and a rewards program that now has more than 21 million members.”
Dan Caplinger, one of Bowman’s colleagues at The Motley Fool and a Nobias 4-star rated analyst, published a piece more recently, highlighting CMG’s Q2 results. Regarding the company’s operations, Caplinger wrote, “Chipotle's gains came after strong second-quarter earnings results. The fast-casual chain saw revenue soar 39% from the year-ago quarter, as comparable restaurant sales climbed 31.2%. Chipotle's earnings performance was even more impressive, with adjusted figures of $7.46 per share representing a more than 18-fold jump year over year.” Caplinger continued, touching upon the success of CMG’s digital sales, noting that they were up double digits on a year-over-year basis, and brought up the company’s growth potential, saying, “Looking ahead, Chipotle expects full-year comparable restaurant sales growth in the low to mid-double-digit percentage range, with 200 or more new restaurant openings. Restaurants are coming back, and Chipotle looks like it's poised to get back to its winning ways.”
Coming into the quarter, expectations for the company’s growth were high. One could argue that the stock was priced to perfection coming into the Q2 print, which tends to lead towards downside once the results are actually posted due to the difficulty of meeting such high expectations. However, it appears that CMG did just that.
On July 4th, Neil Patel, a Nobias 4-star rated analyst, published an article on The Motley Fool, which highlighted the growth potential laid out by CMG’s CEO Brian Niccol at a recent Piper Sandler Investor Conference. Regarding the company’s 2021 growth acceleration, Patel wrote, “Niccol mentioned Chipotle is now "going to start talking about $3 million, $3.5 million AUVs (annual unit volumes)." This is up meaningfully from a previous AUV target of $2.5 million, which he highlighted as recently as the first-quarter 2021 earnings call in April.” And, Patel continued, the company’s digital growth (online orders via the Chipotle App) are an even stronger tailwind for the company. He said, “In each of the last four quarters, sales via digital channels more than doubled with the second and third quarters of 2020 growing in excess of 200%. Chipotle now counts 21 million rewards members, quite the accomplishment given the program was launched just over two years ago.”
Patel believes that the digital growth is not likely to hamper in-store orders either, noting “This thinking certainly supports the rosy sales outlook, as only an estimated 10% to 15% of customers actually both dine in and order online. “ Patel also highlighted CMG’s international expansion as a potential catalyst to drive share prices higher. He touched upon Niccol’s comments regarding expansion into non-U.S. markets, saying, ‘There are currently 24 locations in Canada, but there's potential for a "few hundred." Furthermore, expansion into Europe (Chipotle has 11 stores in the U.K. today) could drive unit growth as well.” But, even with all of this potential in play, Patel also made it clear when making investments, “valuation matters.”
It’s clear that CMG trades with a lofty valuation today. The stock is currently trading for approximately 70.5x 2021 consensus earnings-per-share expectations, which puts Chipotle firmly into the speculative growth category (this multiple is more than 3x higher than the ~21x forward price-to-earnings multiple that the S&P 500 trades with). And, to conclude his piece, Patel attempts to break down the future potential of the company from sales, operating income, and earnings-per-share perspective, to highlight its total return potential for investors purchasing shares at today’s prices. Patel attempts to look out 10 years to 2031 by looking at store expansion prospects and store profitability metrics. He says, “Even if the company has 6,000 locations (reiterated by Niccol as a long-term goal on the earnings call) in 10 years, which equates to 320 openings per year, annual revenue in 2031 would total about $21 billion.”
Patel continues, noting that prior to the E.coli outbreak in 2015, CMG’s profit margins hovered around 10%. But, he notes, “it has since fallen due to higher food and safety costs.” For the sake of this bullish scenario, he projects 12% margins, due to “greater volume and subsequent operating leverage” which, alongside store expansion, would result in annual earnings of approximately $2.5b in 2031.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Moving to valuation, he says, “In 10 years' time, let's say the stock carries a forward earnings multiple of 38. This is what Starbucks, at this point a mature food and beverage giant, trades at as of this writing. This would result in a modest compound annual return of just 8% over the next decade. And remember, this is in a best-case scenario where Chipotle opens more stores per year than it ever has and achieves a profit margin it never has before.” With this in mind, he concludes his article saying, “For outside investors wanting to get in on this fast-casual leader, it's best to wait for a meaningful pullback before you even think of purchasing shares.”
Overall, Patel seems to be more cautious than most on CMG’s future. Looking at the 4 and 5-star rated analyst who’ve published articles on Chipotle during the last month, we see 20 “Buy” opinions posted as opposed to just 3 “Sell” ratings. In fact, 80% of the credit authors that we track are “Bullish” on CMG shares.
The average price target on CMG provided by these credible authors is 1832.63 however, which only points towards minimal upside. But, it’s important to note that many analysts have yet to update their evaluation models since the Q2 results. We’ve seen 5 5-star rated analysts update their price targets on CMG shares since the recent Q2 report and the average updated price target there was $1921, which implies upside potential of 4.9%.
Disclosure: Nicholas Ward has no CMG position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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