Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Chipotle Stock: Valuation Leaves Little Room for Error

Stock MarketsSep 20, 2021 08:30PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Chipotle Stock: Valuation Leaves Little Room for Error

Chipotle Mexican Grill (CMG) has seen a significant increase in share price over the past year due to its improving fundamentals.

The company owns and operates 2,724 Chipotle (NYSE:CMG) restaurants in the United States, 40 international Chipotle restaurants, and four non-Chipotle restaurants. 

In Q2, sales grew 31.2% and margins improved as well. Although the future of the company looks bright, we remain neutral on CMG. (See Chipotle stock charts on TipRanks) 

Industry Analysis, Growth Catalysts 

Pre-pandemic, the global fast food and quick service restaurant market size was valued at $257.19 billion, and was forecasted to grow at a compounded annual growth rate (CAGR) of 5.1% from 2020 to 2027. 

The expected market growth is due to an increasing global preference for fast food among Generations X, Y, and Z, an increase in the number of fast-food restaurants, and technology advancements.

Of course, the pandemic disrupted things in 2020, but the underlying trend remains intact. Advancements, and the increasing adaptation of technology, have made it easier for people to get the meals they want. 

Think of apps like Uber (NYSE:UBER) Eats or SkipTheDishes, or curbside pickup options. People value convenience, and will pay for it by eating at restaurants such as Chipotle. 

Speaking of convenience, Chipotle is investing in it through opening more “Chipotlanes,” which are essentially drive-thrus. The good thing about Chipotlanes is that their unit economics are better than regular restaurants. 

Here is what Chipotle’s CFO, Jack Hartung, had to say about Chipotlanes in the most recent earnings call: 

“New Chipotlanes are opening with about 20% higher sales compared to the non-Chipotlanes opened during the same time period. Over the trailing 12 months, Chipotlanes restaurant continues to drive about a 15% higher overall digital sales mix compared to non-Chipotlanes, and it's skewed heavily towards order ahead, our highest margin transaction.” 

Chipotle anticipates that adding Chipotlanes will improve the company’s returns on capital. This makes sense because as mentioned in the quote above, Chipotlanes generate higher margin revenue, which should give a boost to overall margins going forward. Management also expects margins to increase in the long-term. 

Besides Chipotlanes, Chipotle opened a digital kitchen location in 2020 that offers only pickup and delivery. If CMG finds that it is worth it to add more of these locations, then it can be another growth catalyst going forward. 

With the opening of new locations and an expected increase in average unit volume (from $2.41M to $3M), CMG’s revenue is forecasted by analysts to increase by 25.7% in 2021, and 13.9% in 2022. 

Main Risks 

CMG’s stock is currently near all-time highs. It's up 42.8% year-to-date and 58.2% in the past year, versus 17.8% year-to-date and 27.8% in the past year for the S&P 500.

A lot of optimism could currently be priced into the stock, as one might be able to tell from the stock’s runup, 71.4x EV/FCF multiple, and 8.2x EV/Sales multiple, which is the highest this multiple has ever been with data going back to 2006. 

The high optimism leaves little room for error, and makes the stock vulnerable to large price drops on any disappointing news. 

As well, particularly from 2015-18, CMG had been involved in many food illness outbreaks which hurt the company’s reputation and financial performance.

If you are a Chipotle investor, keep in mind that another outbreak can happen at any time, and if it gathers lots of media attention, then it will certainly hurt the stock price. Nonetheless, this doesn’t seem to be a problem for now.  

Wall Street’s Take 

Turning to Wall Street, 23 analysts offered 12-month price targets for Chipotle in the last three months. Chipotle has a Moderate Buy consensus rating, based on 16 Buys and seven Holds. 

The average CMG price target is $1,913.45, with a high forecast of $2,600 and a low forecast of $1,600. The average price target represents 1% upside from current levels.

Final Thoughts 

Chipotle can continue to execute going forward, but the risk/reward is not great, as the stock is near all-time highs, and has an extended valuation.  

Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.

​Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Chipotle Stock: Valuation Leaves Little Room for Error
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email