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Chipotle Has Risen 160% from Its March Lows, Looking Ahead

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Chipotle Mexican Grill (NYSE:CMG) has bounced back strongly from its March lows by rising 168.8%. The stock hit a new 52-week high of $1145.63 on July 7. The company reported an impressive first-quarter performance in April and beat analysts’ revenue and EPS expectations. The digital sales grew by 80.8% during the quarter. Last month, the company expanded its delivery service by partnering with Grubhub. Chipotle also launched the Chipotle app in Canada. Amid the pandemic, people prefer to have their food delivered to their homes instead of eating at restaurants. These initiatives could help Chipotle capture the growth in demand for delivery services. Investors’ optimism about implementing these initiatives led to a rise in the company’s stock price. 

So, after the spectacular rise, what’s next? Should investors book profits or hold the stock? I think that the company’s valuation looks stretched. The stock has moved into overbought territory. First, let’s discuss analysts’ expectations and recommendations for Chipotle.

Analysts’ revenue expectation for Chipotle

Despite temporarily closing restaurants due to lockdowns, analysts expect Chipotle’s revenue to rise by 1.6% to $5.68 billion this year. In 2021, they expect Chipotle to report revenue of $6.59 billion, which represents a rise of 16.2% YoY. I think that opening new restaurants and positive SSSG (same-store sales growth) should drive the company’s revenue. Chipotle’s investment in digital and delivery services, like implementing digital make lines and adding Chipotlanes, the new partnership with Grubhub, and launching the Chipotle app in Canada, could drive its SSSG. 

In the first quarter, Chipotle opened 19 new restaurants. Among the new restaurants, 11 had Chipotlanes. The restaurants with Chipotlanes outperformed non-Chipotlane restaurants by 5%–10% even before the COVID-19 outbreak. Now, the gap has increased to 30%.

Analysts’ EPS expectations

Although Chipotle’s revenue will likely rise, analysts expect its EPS to shrink by 33.3% to $9.38 in 2020. The decline in the company’s EBIT margin from 8.9% in 2019 to 5.5% could drag its EPS down. I think that the increase in hygiene-related expenses amid the pandemic, higher delivery expenses due to increased delivery sales, and wage inflation could lower the company’s EBIT margin.

However, analysts expect the company’s EPS to rise by 103.3% in 2021 to $19.05. The sales growth and improved EBIT margin could drive the company’s EPS. The company’s EBIT margin could rise from 5.5% in 2020 to 10.8%. I expect the sales leverage from positive SSSG and growth in higher-margin online sales to expand the company’s EBIT margin.

Chipotle’s valuation multiple and analysts’ recommendations

As of July 9, Chipotle was trading at a forward PE ratio of 77.6x. The company was trading at a premium compared to its average forward PE ratio of 44.8x for the past three years. Also, as of July 9, McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) were trading at 26.8x and 33.1x, respectively.

Wall Street prefers a “hold “rating for the stock. Among the 35 analysts, 51.4% recommend a “hold,” while 48.6% recommend a “buy.” None of the analysts recommend a “sell.” Since the beginning of June, Wedbush, Jefferies, Telsey Advisory Group, Credit Suisse, Piper Sandler, and Bank of America have all raised their target prices. As of July 9, analysts’ consensus target price was $1,009.15, which represents a fall of 9.5% from its current stock price.

My take

Although I think that Chipotle’s growth story is still intact, its valuation looks very expensive. Currently, the company trades at 58.5x analysts’ 2021 EPS expectations. So, I think that investors should book profits at these levels. The markets could be volatile for the next few months amid rising COVID-19 cases.

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