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Chipotle Crushed Q3 Earnings: Stock a ‘Buy’ on Dips?

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Oct. 23 2019, Published 7:33 a.m. ET

  • Chipotle posted stellar third-quarter earnings, which beat analysts’ expectations by a wide margin.
  • The comps were better than analysts’ expectations.
  • Chipotle stock could rise more.

As we expected, Chipotle (CMG) posted stronger-than-expected third-quarter earnings after the markets closed on Tuesday. The company’s revenues and earnings continued to grow at a breakneck pace and beat analysts’ expectations by a wide margin. However, the stock closed 2.4% lower, which reflected a broad-based decline across restaurant stocks. McDonald’s (MCD) weak performance might have weighed on restaurant stocks.

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For example, Shake Shack (SHAK) fell 4.7% on Tuesday. Meanwhile, Starbucks (SBUX), Dunkin’ Brands (DNKN), and Yum! Brands (YUM) stocks fell 2.2%, 2.0%, and 1.67%, respectively. Notably, McDonald’s stock closed 5.0% lower. The company’s weaker-than-expected third-quarter revenues and EPS didn’t sit well with investors. McDonald’s US comps also fell short of the estimates.

Chipotle stock fell about 2% in after-hours trading following its third-quarter earnings. The company expects a delay in some new store openings, which irked investors. Also, the company plans to add drive-thru lanes or Chipotlanes at about 40 stores, which will likely increase the construction time for new openings.

Despite the delay in new openings, we think that Chipotle could sustain the momentum in comparable sales or comps. The company’s comps growth rate has accelerated for the seventh consecutive quarter, including the third quarter. Sales leverage and margin expansion will likely drive Chipotle’s earnings. Overall, the company’s earnings could grow at a strong pace.

Sustained momentum in sales, margins, and earnings will likely support Chipotle stock.

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Key takeaways from Chipotle’s earnings

Chipotle posted revenues of $1.40 billion—up 14.6% YoY (year-over-year). The company’s revenues beat analysts’ expectations of $1.38 billion. Also, the comps increased 11.0%—higher than analysts’ expectation of 9.3%. The comps gained from a 7.5% increase in transactions and a 3.5% rise in the average check. Notably, higher menu prices drove the average check size. Chipotle’s digital sales rose 87.9%, which represented 18.3% of its total sales in the third quarter.

Chipotle’s food, beverage, and packaging costs as a percentage of revenues fell by 20 basis points to 33.2%. The decline reflected higher menu prices, which were partially offset by higher ingredient costs. The restaurant-level operating margin expanded by 210 basis points to 20.8%, which reflected higher sales leverage and higher menu prices. However, increased wages, delivery expenses, and ingredient costs remained a drag.

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Stellar sales growth and margin expansion drove Chipotle’s earnings in the third quarter. A considerable decline in the effective tax rate supported the company’s earnings growth. Chipotle posted an adjusted EPS of $3.82, which rose about 77% YoY and beat analysts’ EPS estimate of $3.22 by a wide margin.

In comparison, McDonald’s missed analysts’ sales and EPS estimate in the third quarter. The company’s revenues of $5.43 billion fell short of analysts’ estimate of $5.49 billion. Meanwhile, McDonald’s adjusted EPS of $2.11 fell 2% YoY, which didn’t meet analysts’ estimate of $2.21.

Analysts increased the target price

Multiple analysts raised their target price on Chipotle after its third-quarter earnings. J.P. Morgan increased the target price to $845 from $705. Cowen raised the target price to $800 from $740. Meanwhile, Jefferies increased the target price to $850 from $820. KeyBanc raised the target price to $900 from $870. However, Stifel lowered the target price to $750 from $755.

Chipotle’s management expects its 2019 comps growth to be at the higher end of the previous guidance. Earlier, Chipotle expected high-single-digit growth in comps for 2019.

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