21 Oct

Chipotle Stock: Analysts Upbeat before Q3 Earnings

  • Bank of America Merrill Lynch upgraded Chipotle stock to “neutral.”
  • We think that sustained momentum in the company’s comps and margins could lift the stock more.
  • Chipotle stock has risen about 95% YTD.

Chipotle’s upcoming earnings

On October 18, Bank of America upgraded Chipotle (CMG) stock from “underperform” to “neutral.” Moreover, the bank increased its target price to $850 from $590.

Bank of America analyst Gregory Francfort expects Chipotle to beat the expectations in the near term. Sustained momentum in sales led by digital and a decline in avocado prices will likely support the company’s margins and EPS.

Besides Bank of America Merrill Lynch, SunTrust raised its target price on Chipotle stock to $920 from $900. On October 17, Evercore ISI increased its target price to $940 from $845.

Analysts’ optimism on Chipotle stock before its third-quarter earnings indicates that the company will likely beat the estimates. Notably, the stock could rise more. Chipotle is scheduled to report its third-quarter earnings on October 22.

We think that Chipotle could continue to post stellar growth in its comps and margins. The company’s revenues will likely gain due to strong comparable restaurant sales. The company’s digital initiatives, including delivery expansion, could continue to drive traffic and the average check.

Chipotle’s margins could continue to expand due to higher comps and supply-chain efficiencies. Analysts expect moderating avocado costs to help Chipotle’s margins. Higher sales and margin expansion will likely drive the company’s EPS.

Analysts’ expectations and Chipotle’s stock performance

Analysts expect Chipotle’s third-quarter revenues to be $$1.38 billion, which implies YoY (year-over-year) growth of about 13%. Meanwhile, analysts expect the EPS to be $3.21, which reflects a YoY increase of about 48%. The company beat analysts’ expectations in the last seven quarters, which could continue in the third quarter.

So far, the stock has outperformed broader markets by a wide margin and registered exceptional growth. The strong financial performance, including upbeat comps guidance, rising digital sales, and margin expansion, supported the stock. We think that the growth momentum in sales, margins, and earnings will likely sustain in the coming quarters.

Chipotle stock has risen about 95% on a YTD (year-to-date) as of October 18. In comparison, other major restaurant stocks have also garnered healthy returns this year. Shake Shack (SHAK) stock has more than doubled on a YTD basis. Meanwhile, Wendy’s (WEN), McDonald’s (MCD), Dunkin’ Brands (DNKN), and Restaurant Brands International (QSR) stocks have risen 38.4%, 17.4%, 18.4%, and 32.2%, respectively.

McDonald’s will also report its third-quarter earnings before the markets open on Tuesday. Analysts expect McDonald’s to post an adjusted EPS of $2.21 on revenues of $5.49 billion.

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