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Is There More Upside to Chipotle’s Stock Price?

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Earlier this week, Chipotle Mexican Grill (NYSE:CMG) reported an impressive first-quarter performance. For the quarter, the company outperformed analysts’ EPS expectation of $2.90. The company reported an adjusted EPS of $3.08. Meanwhile, Chipotle’s sales were in line with the expectations at $1.41 billion. The company’s digital sales grew 80.8% during the quarter to $371.8 million. The stock rose due to better-than-expected earnings and strong digital sales. As of April 23, the company was trading at $867.02, which represents a rise of 10.2% since Chipotle reported its first-quarter earnings. The amount also represents an increase of 108.9% from the lows on March 18. However, the company is still trading at a discount of 4.7% from its 52-week high of $909.88.

So, is there more upside to Chipotle’s stock price? First, we’ll look at analysts’ expectations for the next four quarters and their recommendations.

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Analysts’ revenue expectations for Chipotle

For the next four quarters, analysts expect Chipotle to report revenue of $5.75 billion—a rise of 1.1% from $5.69 billion in the same four quarters of the previous year. During the first-quarter earnings call, the company’s management stated that its SSSG (same-store sales growth) for March fell by 16%. For the week ended on March 29, the company reported a decline of 35%. However, management added that its SSSG improved this month. Last week, the company reported a decline by the high-teens in its SSSG. So far this month, Chipotle has seen its in-store ordering fall by 75%. However, the delivery and order ahead segments rose by 150% and 120%, respectively. So, digital sales have accounted for 70% of the company’s total sales this month.

Meanwhile, with social distancing in place, Chipotle continues to invest in digital and delivery services to reduce friction among processes and enhance customers’ experience. The company has focused its marketing and promotional offers on digital and delivery services. Due to the difficult environment, the company delayed remodeling its investments. However, Chipotle will still install digital make lines and add Chipotlanes. Along with these initiatives, adding new restaurants could drive the company’s revenue.

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EPS expectations for Chipotle

Analysts expect Chipotle’s EPS to decline during this quarter and the next quarter. However, they expect the company to report double-digit EPS growth in the fourth quarter of 2020 and the first quarter of 2021. Overall, for the next four quarters, analysts expect Chipotle to report an EPS of $9.67, which represents a fall of 29.7% from the same four quarters of the previous year. The decline in the company’s EBITDA margin and a higher effective tax rate could lower the company’s EPS during the next four quarters.

Analysts’ recommendation

Since Chipotle reported its first-quarter earnings, many analysts have raised their target prices. BMO, RBC, Cowen, Stifel, SunTrust Robinson, Telsey Advisory Group, Wedbush, JPMorgan Chase, Jefferies, Credit Suisse, and KeyBanc have all raised their target prices. Meanwhile, BMO upgraded the stock from “underperform” to “market perform.” As of April 23, analysts’ consensus target price was $865.64, which represents a fall of 0.2% from its stock price of $867.02. Also, Wall Street is bullish on the stock. Among the 34 analysts, 50% recommend a “buy,” while 50% recommend a “hold.” None of the analysts recommend a “sell.”

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Valuation multiple

The recent surge in Chipotle’s stock price has also raised its valuation multiple. As of April 23, Chipotle was trading at a forward PE ratio of 70.0x compared to 46.8x at the beginning of this year. The company is trading at a premium compared to Starbucks (NASDAQ:SBUX) and McDonald’s (NYSE:MCD). On the same day, Starbucks and McDonald’s were trading at forward PE ratios of 31.0x and 26.8x, respectively. Starbucks will likely report its second-quarter earnings on April 28. For analysts’ expectations, read Why Starbucks Is a ‘Hold’ before Its Q2 Earnings.

Meanwhile, the company is trading at 97.5x analysts’ 2020 EPS estimate of $8.89 and at 47.2x analysts’ 2021 EPS estimate of $18.38. These EPS estimates represent a YoY fall of 36.7% in 2020 and growth of 106.8% in 2021.

My take on Chipotle

Compared to a decline of 35% in the SSSG during the last week of March, Chipotle has managed to improve its SSSG to a decline in the high-teens in the last week. The company stated that it had $909.2 million in cash, restricted cash, and short-term investments at the end of the first quarter. So, the company’s management added that even with its SSSG as low as 30%, it can sustain over a year. Also, Chipotle stated that it’s working with bank partners for $250 million–$500 million of revolving credit facility. Along with these factors, the company’s increasing digital sales make me bullish on the stock. However, under the current valuation, the company looks very expensive. So, I think that there’s limited upside for the stock. Investors should avoid the stock until it cools off to buying levels.

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