18 Oct

Chipotle: Investors Could Get Richer after Q3 Earnings

WRITTEN BY Amit Singh

Chipotle investors have a lot to celebrate this year. The company is firing on all cylinders. Chipotle generated stellar sales and earnings growth. Meanwhile, the stock outperformed the broader markets by a wide margin. The stock has risen 92.0% on a YTD (year-to-date) basis as of Thursday. In comparison, the S&P 500 has risen 19.6%.

Notably, Bill Ackman’s Pershing Square Holdings has outperformed the markets due to its investment in Chipotle stock. The rally in Chipotle stock isn’t over yet. Instead, investors could get richer after Chipotle announces its third-quarter earnings. We’ll discuss why Chipotle isn’t done making money for investors.

Chipotle stock rose after third-quarter earnings 

Chipotle Mexican Grill (CMG) is scheduled to report its third-quarter earnings on October 22. Despite the rise in Chipotle stock, we think that the third-quarter earnings could drive the stock more. The company could continue to post strong sales and earnings growth despite tough comparisons, which will likely drive its stock higher.

Chipotle’s top line could continue to grow at a double-digit rate due to strong comparable restaurant sales. The company’s comps are increasing at a rapid pace. The comps have accelerated for six consecutive quarters.

We think that Chipotle’s digital initiatives, including expanded delivery services, will likely drive its comps even higher. Chipotle’s digital sales are growing at a stellar rate. Notably, digital sales carry a higher average check, which will likely support the company’s comps. Meanwhile, higher menu prices will help the company. Chipotle’s revamped marketing strategy and convenient digital offerings bode well for growth.

We think that food costs will likely remain elevated due to higher avocado prices. However, Chipotle’s margins could continue to expand due to leverage from comps, supply-chain efficiencies, and better sourcing.

During the second-quarter conference call, Chipotle’s management said that it expects comps and margins to continue to expand in 2019. Stellar sales growth and margin expansion will likely drive Chipotle’s earnings, which could continue to beat the estimates.

On Thursday, Evercore ISI raised the target price on Chipotle stock to $940 from $845. The new target price represents an upside of 13% based on the closing price of $829.07 on Thursday.

Analysts’ expectations

Analysts expect Chipotle to post revenues of $1.38 billion, which implies YoY (year-over-year) growth of about 13%. Third-quarter revenues will likely benefit from a high-single-digit increase in comps. Contributions from new stores will likely support the company’s sales. Chipotle beat analysts’ expectations in the last three quarters, which could continue.

In the previous quarter, Chipotle’s revenues rose 13.2% YoY. The comps rose 10%, which reflected 7% growth in transactions.

Analysts expect Chipotle to post an adjusted EPS of $3.19, which implies YoY growth of about 48%. The high growth expectation despite tough comparisons shows the strength in Chipotle’s business. Notably, the company has beat analysts’ expectations for seven consecutive quarters. Chipotle’s earnings have grown at an impressive pace over the past several quarters.

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