Case Study: Chipotle (CMG) stock according to high performing analysts
Key Points
Performance
Chipotle Mexican Grill (CMG) shares fell by 6.16% this week. However, on a year-to-date basis, CMG shares are up by 15.52%. This compares favorably to the S&P 500, which is up by 6.96% during 2023 thus far.
Event & Impact
Chipotle posted fiscal fourth quarter results this week, missing Wall Street estimates on both the top and bottom lines. During Q4, Chipotle’s revenue totaled $2.2 billion, which was $30 million below analyst estimates, representing 11.2% year-over-year growth. CMGs Q1 non-GAAP earnings-per-share came in at $8.29/share, missing Wall Street’s consensus estimate by $0.60/share.$0.99/share, beating Wall Street’s consensus estimate by $0.08/share.
Noteworthy News:
Chipotle’s same-store-sales missed expectations during Q4, coming in at 5.6% compared to consensus estimates of 7.0%. CMG continued to grow its store count, however, opening 100 new stores during Q4, signaling future revenue growth.
Nobias Insights
67% of recent articles published by credible authors focused on Chipotle shares offer a “bullish” bias. Also, 100% of the credible Wall Street analysts who cover CMG believe shares are likely to rise in value. The average price target applied to Chipotle by these credible analysts is $1871.67, which implies upside potential of approximately 18.2% relative to the stock’s current share price of $1583.89.
Bullish Take Margaret Moran, a Nobias 5-star rated author, said, “Chipotle has been posting sector-leading growth for several years now, more than doubling its store count over the past decade from around 1,400 to over 3,100 while also improving its same-store sales consistently.”
Bearish Take Muslim Farooque, a Nobias 4-star rated author, said, “Investors must pay a premium to wager on Chipotle, but with economic uncertainty and bearish market sentiment, I think it would be best to avoid such an overvalued option.”
CMG Feb 2023
Chipotle Mexican Grill (CMG) posted Q4 earnings this week, causing the stock to sell off. CMG shares were down by 6.16% on the week, pushing their year-to-date gains down to 15.52%. It’s important to note that these 15.5% year-to-date gains still represent significant outperformance relative to the S&P 500, which has risen by 6.96% thus far during 2023.
When it comes to CMG shares, there appears to be a bull/bear tug of war going on between individuals who believe that the stock’s high valuation premium is warranted due to the stock’s strong fundamental growth profile and those who believe that shares are overvalued.
Bearish Nobias Credible Analysts Opinions:
Taking the bearish side of the debate, Muslim Farooque, a Nobias 4-star rated author, highlighted Chipotle’s quarterly results in an article that he published at GuruFocus this week. He began his report stating, “Restaurant giant Chipotle Mexican Grill Inc. reported weaker-than-expected results to close out 2022 on Tuesday, leading to a sell-off.”
He continued, “Wrapping up 2022, Chipotle's results for the three months ended Dec. 31 came in behind analysts' estimates. The fourth quarter was a major blemish to its excellent record of earnings surprises as non-GAAP earnings per share missed estimates by 60 cents. Moreover, its $2.2 billion in revenue missed expectations by $30 million. Same-store sales growth of 5.6% also fell short of not only the market's projections, but its own.”
“On a more positive note,” Farooque said, “the company opened 100 new restaurants during the three-month period, bringing its total restaurant count to a whopping 3,100.”
With CMG’s slowing growth in mind, Farooque questioned the stock’s valuation level. He said, “Chipotle is currently trading at a price-earnings multiple of 59.99. While there is momentum, making it a strong contender for a premium valuation, given how new investors are playing and the stock's recent price surge, it may not currently be the best value opportunity.” He continued, “That becomes especially apparent when you contrast it with companies like Yum Brands Inc. (YUM) and McDonald's Corp. (MCD) which trade at multiples of 28.91 and 32.09.”
He put a spotlight on the macro risk that CMG shares are facing, stating, “A recession could have dire consequences for Chipotle since its fast-casual approach targets consumers who allocate much of their discretionary spending to restaurant dining.”
Farooque did note that , “Chipotle's stock has seen tremendous growth, with a return north of 500% over the past five years.” He said, “Revenue and Ebitda growth rates have averaged roughly 14% and 31.7% over the past five years.”
But, what’s in the past is in the past, and today, he says, “Investors must pay a premium to wager on Chipotle, but with economic uncertainty and bearish market sentiment, I think it would be best to avoid such an overvalued option.”
Bullish Nobias Credible Analysts Opinions:
Taking a bullish stance, Margaret Moran, a Nobias 5-star rated author, published an article at Yahoo Finance this week explaining why Chipotle is a “notable exception” to the poor performance that most growth stocks have posted over the last year or so. She touched upon CMG’s valuation, stating, “The quick-service Mexican-inspired food chain has a price-earnings ratio of 56.09 [reflecting the stock’s sell-off during the back half of this week], which stands far above its industry average of 23.60.”
With this premium valuation in mind, Moran posed the question, “Why is the market still so bullish on Chipotle?” “The answer could lie with the more defensive nature of its business in the food industry combined with its rapid growth in recent years,” she continued. “Moreover,” Moran wrote, “while competitors are trying to cut back on expenses, Chipotle is still chugging ahead with its expansion plans and it is doing so while maintaining an incredibly strong balance sheet.”
Regarding Chipotle’s historical growth, she said, “Chipotle has been posting sector-leading growth for several years now, more than doubling its store count over the past decade from around 1,400 to over 3,100 while also improving its same-store sales consistently.”
Furthermore, Moran touched upon the company’s future growth plans, stating, “In February 2022, CEO Brian Niccol upped that guidance, saying, Over the long term, we now believe we can operate at least 7,000 Chipotle restaurants in North America, up from our prior goal of 6,000.” She also noted that Chipotle’s food offering set it apart from its peers. She wrote, “The companys [sic] dedication to fresh and healthy ingredients makes it unique among large-scale fast-food chains.” “Additionally,” she said, “Chipotles meals are made to order rather than coming in a preset recipe that is impossible to change.”
With regard to CMG’s performance over the past year or so - during a period that the United States has experienced inflation that consumers haven’t seen in decades - Moran said, “A key indicator of customer loyalty and the existence of a moat is whether demand can withstand price increases due to inflation.” Looking at Chipotle’s data, she continued, “Year over year, its menu prices are up about 13%, but same-store sales still grew 7.6% year over year in the third quarter of 2022, indicating some resilience.”
Now, Moran makes it clear that “It has not all been smooth sailing” for the company or its shareholders over the past decade or so. She said, “While revenue growth has been consistent at a rate of 12.30% per year for the past decade, earnings have been inconsistent due to a combination of growth investments, the pandemic and a shocking E. coli breakout in July 2015 that resulted in 43 store closings”.
But, despite those headwinds, the stock continues to trade with that 56x earnings multiple and, as Moran notes, “According to GuruFocus discounted cash flow calculator, Chipotle will need to grow its earnings by around 27% per year for the next decade to be worth its current valuation.”
That’s a high bar to clear for any company, especially one that operates in the food and beverage space; however, Moran concluded her report by stating, “If Chipotle can double its store count over the next decade like it did during the previous decade, even if it does not mean the 27% per year threshold exactly, it could make up the difference with high valuation multiples.”
With regard to the company’s most recent quarterly results and the potential for ongoing price increases, Shawn Johnson, a Nobias 4-star rated author, noted that, “Chipotle (CMG) will let consumers digest its latest price hike before it cooks up more food in 2023” in a recent article that he published at Business News. Johnson quoted Chipotle CFO Jack Hartung who spoke in a recent Yahoo Finance Live video, saying, “We have no plans to dial back menu price increases, but we have no plans to raise prices.”
Johnson wrote, “Hartung’s call on prices came after Chipotle felt some pushback from low- and middle-income consumers in the fourth quarter.” He continued, “Same-store sales growth clocked in at 5.6%, cooling from a growth rate of over 7% in the third quarter as customer traffic softened.” “Fortunately for Chipotle,” he continued, “higher menu prices haven’t caused continued traffic weakness in 2023.”
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.
Although CMG’s Q4 results fell short of Wall Street’s expectations, Johnson wrote, “The company said same-store sales grew by a low double-digit percentage in January. For the first quarter, Chipotle guided for a high single-digit percentage same-store sales gain.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, after CMG’s Q4 report and the stock’s recent pullback, both the credible author and analyst communities that the Nobias algorithm tracks remain overly bullish on Chipotle shares. 67% of recent articles published by credible authors on the stock have expressed a “Bullish” sentiment. 100% of the credible Wall Street analysts that Nobias follows who have expressed an opinion on CMG shares believe that they’re likely to increase in value.
Currently, Chipotle trades for $1583.89/share. The average price target being applied to the stock by the credible Wall Street analysts that Nobias follows is $1871.67, which implies upside potential of approximately 18.2%.
Disclosure: Nicholas Ward is long CMG. Nicholas Ward wrote this article for Nobias at their request with the intention 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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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.