uploads/2019/10/AdobeStock_292165204_Editorial_Use_Only.jpeg

Will Chipotle’s Q2 Earnings Boost Its Stock Price?

By

Updated

So far this year, Chipotle Mexican Grill has outperformed its peers and the broader equity markets. While many of the companies in the food-service business continue to struggle, Chipotle has delivered strong returns of 34.9 percent. Amid the COVID-19 outbreak, the company focused on strengthening its delivery and carry out services. Chipotle implemented a separate make-line that only targets digital orders in most of its restaurants. The company also expanded its delivery service across the U.S. through its partnership with Grubhub. Earlier this week, the company announced that it will open its 100th Chipotlane, the company’s drive-thru digital order pick-up lane, later this month. So, all of these initiatives have increased investors’ optimism. We will have to see whether Chipotle meets investors’ expectations. The company will likely report its second-quarter earnings after the market closes on July 22.

Analysts expect Chipotle’s sales to decline

Amid the COVID-19 pandemic, Chipotle had to temporarily close some of its restaurants. In other restaurants, the company only operated delivery and carry-out services. Restaurants had to close their dine-in spaces amid the lockdown. Temporarily closing restaurants and dine-in spaces could be a drag on the company’s second-quarter sales. Analysts expect Chipotle to report revenue of $1.32 billion. The amount represents a fall of 8.1 percent from $1.43 billion in the second quarter of 2019. The company could post negative SSSG during the quarter. Some of the declines could be offset by the net addition of new restaurants and growth in digital sales.

At the end of the first quarter, Chipotle operated 2,595 restaurants, which represents a net addition of 113 stores since the beginning of the third quarter of 2019.

In the first few weeks of April, Chipotle’s in-store orders declined by 75 percent. However, the company’s delivery and order ahead increased by 150 percent and 120 percent, respectively. Digital sales accounted for more than 70 percent of the company’s overall sales. Implementing Chipotlanes and expanding delivery services could have contributed to the company’s digital sales growth.

Chipotle’s EPS could sink in Q2

Analysts expect Chipotle to report an adjusted EPS of $0.19 in the second quarter. The amount represents a decline of 95.3 percent from $3.99 in the second quarter of 2019. Along with lower sales, a decline in the EBIT margin could drag the company’s EPS down. Analysts expect the company’s EBIT margin to contract from 10.1 percent to just 0.3 percent. The deleverage from negative SSSG, initiatives to focus on employee hygiene, higher delivery expenses, and various promotional offers could put pressure on the company’s EBIT margin.

Liquidity and valuation

Chipotle is a zero-debt company. The company’s net cash was $909 million at the end of the first quarter. So, the company is adequately capitalized to finance its expansion plans. The recent surge in Chipotle’s stock price pushed the company’s valuation multiples higher. As of July 16, the company was trading at a higher forward PE ratio of 76.4x compared to its average forward PE ratio of 45x over the last three years. So, the company’s valuation looks very expensive. On the same day, McDonald’s and Starbucks were trading at a forward PE ratios of 27.5x and 32.9x, respectively.

Analysts’ recommendations

Analysts are bullish on Chipotle. So far this month, KeyBanc, Wells Fargo, Credit Suisse, Piper Sandler, and Bank of America have all raised their target prices. Among these five investment firms, Piper Sandler gave the highest target price of $1,400, while Credit Suisse’s target price was the lowest at $1,150.

Overall, 35 analysts cover the stock. Among the analysts, 48.6 percent recommend a buy, while 51.4 percent recommend a hold. None of the analysts recommend a sell. As of July 16, analysts’ consensus target price is $1,052.58. The target price represents a decline of 6.8 percent from the company’s current stock price.

Chipotle's outlook

Chipotle’s second-quarter estimates look weak. However, the company is well-positioned to bounce back in the third quarter. The company’s investments in building Chipotlanes, implementing digital advancements, and expanding its delivery service are vital for future growth. Investors should buy the stock before the company’s earnings.

More From Market Realist