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Is There More Upside to Chipotle’s Stock Price?

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  • Chipotle stock has made a significant recovery from its March 15 lows. I think that there’s limited upside for the stock since its valuation looks expensive. So, investors should look at exiting the stock.

The meltdown in global financial markets amid the COVID-19 outbreak caused Chipotle Mexican Grill (NYSE:CMG) stock to fall to a low of $415 on March 15. Since then, the stock has increased by 69.7% to $704.3 as of April 7. Optimism surrounding the announcement of a $2 trillion stimulus package and the decline in the number of new COVID-19 cases led to a rise in the company’s stock price. However, I see a limited upside for Chipotle stock from its current levels.

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Chipotle’s sales could fall

On March 27, Restaurant Business reported that a survey conducted by the National Restaurant Association indicated a decline of 47% between March 1 and March 22. The declines were before the announcement of a nationwide lockdown. On March 24, the Trump administration announced a nationwide lockdown until April 12. Later, the lockdown was extended until the end of April. Amid social distancing guidelines, most restaurants have closed their dine-in spaces. They’re only operating delivery and take-out services. I think that these measures could lower Chipotle’s sales. Meanwhile, the company wants to reduce the impact of COVID-19 and promote social distancing. The company will offer free delivery services for orders above $10 until the end of April.

On April 2, CNBC reported that 6.6 million people filed for unemployment benefits for the week ending on March 28. The number of people applying for unemployment benefits increased to 10 million in the last two weeks of March. On March 26, The Guardian reported that US Treasury Secretary Steve Mnuchin expects that the US unemployment rate could rise to 20%. The rising unemployment rate could reduce people’s spending power, which would lower restaurant sales. Despite Chipotle’s impressive efforts, I think that it will report weak sales in the next few quarters. Meanwhile, the company owns and operates most of its restaurants. So, declining sales would have a greater impact on Chipotle’s margins.

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Valuation multiple

As of April 7, Chipotle is trading at 51.6x analysts’ consensus 2020 EPS estimate of $13.66 and at 33.8x analysts’ 2021 EPS estimate of $20.82. These estimates represent a year-over-year decline of 2.8% in 2020 and an increase of 52.5% in 2021. With the COVID-19 outbreak, I think that Chipotle’s expansion plans will take a back seat amid weak cash flows. The company’s valuation looks expensive due to a slower rate of new restaurant openings and weak same-store sales.

Analysts’ recommendation for Chipotle

Since the beginning of this month, SunTrust Robinson cut its target price from $1,010 to $841, while JPMorgan Chase lowered its target price from $865 to $615. Last month, Piper Sandler, RBC, Telsey Advisory Group, Jefferies, Stifel, Bernstein, and KeyBanc lowered their target price. All of the price cuts lowered analysts’ consensus target price from $943.09 on March 7 to $819.57 on April 7. The new target price represents a 12-month return potential of 16.4% from Chipotle’s closing price on April 7. Despite the price cuts, Wall Street favors a “buy” rating. Among the 32 analysts, 50% recommend a “buy,” 46.9% recommend a “hold,” and 3.1% recommend a “sell.”

Stock performance

Amid the impressive fourth-quarter performance, Chipotle hit a 52-week high of $940.28 on February 20. However, concerns about the COVID-19 outbreak and its financial implications dragged the stock down to $704.3 as of April 7. YTD, Chipotle stock has fallen by 15.9%. Despite the fall, the stock has outperformed the S&P 500 Index and its peers. During the same period, the S&P 500 Index has fallen by 17.7%. Meanwhile, Shake Shack (NYSE:SHAK) and Starbucks (NASDAQ:SBUX) have declined by 34.8% and 21.8% YTD, respectively. However, McDonald’s (NYSE:MCD), which has franchised 92% of its restaurants, has fallen by 11.1%.

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