Should You Keep Holding Chipotle Stock?

  • Chipotle stock has surged over 63% in one year. The stock has outperformed the broader markets.
  • Chipotle’s long-term growth prospects remain intact.

Recently, Chipotle Mexican Grill (NYSE:CMG) stock has performed exceptionally well. The stock jumped 125% from its March lows. Meanwhile, the stock has increased by 25% so far this year. Chipotle stock has risen about 63% in one year.

Chipotle’s stellar stock performance is due to its solid financial performance, strong liquidity position, and ability to drive profitable growth in the future.

Recent financial performance

Chipotle’s first-quarter performance was impressive. The company’s revenues increased 7.8% YoY (year-over-year) and were in line with Wall Street’s expectation. The company’s top line benefited from stellar growth in the digital channel, which accounted for 26.3% of its total sales. However, the COVID-19 outbreak dragged restaurant sales down.

Chipotle posted an adjusted EPS of $3.08, which fell 9.4% YoY due to the increased promotions, higher delivery expenses, and increased wages. However, the adjusted EPS beat analysts’ expectation.

What’s in the offing for Chipotle stock?

Chipotle’s restaurant sales could stay muted in the current year, which will likely drag its overall sales growth rate down. However, the digital sales could continue to sustain the momentum in the coming quarters. Meanwhile, Chipotle’s bottom line could decline in 2020, which reflects a rise in delivery expenses due to the jump in digital sales. Also, increased labor and food costs could remain a drag.

However, investors should note that Chipotle’s headwinds are short term. The headwinds will likely dissipate. Meanwhile, strong fundamentals should drive the stock higher in the long run.

Chipotle will likely continue to gain from opening new stores, a menu price increase, and digital expansion. Adding drive-thru lanes should support the company’s top line. Meanwhile, the margins could benefit from higher sales and operating leverage in the long term. Also, Chipotle’s strong liquidity position and no debt bode well for future growth.

Analysts’ estimate indicates that Chipotle’s top line will mark strong growth in 2021. The EPS projection indicates high double-digit growth in Chiptole’s bottom line.

Investors with a long-term investment horizon should continue to hold Chipotle stock despite its strong bull run and premium valuation. Any pullback in the stock presents an excellent opportunity to go long.