Chipotle is Cooking Up Another Run at $2,000
A strong quick service food brand jettisoned by drive-through lane innovation appears to have Chipotle on a collision course with the elusive $2,000 mark.
Last year, Chipotle Mexican Grill, Inc. (NYSE: CMG) came within the price of a few burritos of reaching $2,000 a share. A surging digital business tied to the pandemic munchies propelled the stock to an all-time high. Nine months later, it slipped below $1,200.
Now up more than 30% off its summer 2022 low, Chipotle is starting to sizzle again. Restaurants have reopened and recent financial reports have impressed.
Customers have yet to balk at higher prices on free-range chicken quesadillas and other popular menu items. But can this continue?
For now, a strong quick service food brand jettisoned by drive-through lane innovation appears to have Chipotle on a collision course with the elusive $2,000 mark. Let's look under the lid and see why the stock is cooking—and what it'll take to get to "well done.'
How is Chipotle Performing This Year?
Last month, Chipotle announced that revenue rose 17% in Q2 thanks to higher in-store traffic and digital orders. Blossoming relationships with third-party delivery apps Grubhub and UberEats (complete with delivery fee reductions) helped boost the online business, which now accounts for nearly 40% of overall revenue.
Year-to-date the company has hauled in $4.2 billion in revenue compared to $3.6 billion in the first half of 2021. First half earnings per share (EPS) are an even $15.00, a 17% improvement over last year.
Chipotle's return on equity (ROE), a good measure of management performance, is 34% over the trailing 12 month period. This is roughly on par with peers like Restaurant Brands International and Wendy's, and miles ahead of restaurants whose profits are down year-over-year like Domino's Pizza and Yum Brands.
Another area where Chipotle stands out is balance sheet strength. It exited Q2 with a $521 million cash position and no long-term debt. This affords the company ample financial flexibility to pursue long-term growth opportunities.
What are Chipotle's Growth Prospects?
After opening 42 new restaurants last quarter, Chipotle plans to build on its now 3,108-location footprint. By the time the calendar flips to 2023, as many as 250 new restaurants are expected to have been opened in 2022.
A major growth initiative underway at these restaurants is Chipotlane. This is the chain's new dedicated drive-through lane for online orders. Consumers are finding Chipotlanes to be a convenient way to pick up their food without getting caught up in frustrating traffic snarls. Locations that use this format have been a big driver of sales growth and margin expansion. Most of the restaurants opened last quarter have Chipotlanes and, given their positive impact on financials, we can expect more on the way.
Aside from store and Chipotlane expansion, Chipotle is positioned to derive growth from investments in its mobile ordering and delivery platforms. The occasional limited time menu item or promotion sprinkled in will also likely be in the recipe for future growth.
Over the long haul, management is targeting high single-digit revenue growth. If it can continue to reap the rewards of strong digital demand and effective cost controls, this will also come with a healthy side of above-industry earnings growth. The current consensus forecasts for 2022 and 2023 EPS imply 31% and 30% growth respectively.
Will Chipotle Stock Get to $2,000?
In the intermediate term, the main concern around Chipotle is its ability to pass on higher costs to consumers. The longer inflation pressures Americans' budgets, the harder it will be to attract low to middle income consumers. It has thus far been able to manage increased labor, food, and supply expenses, but if a breaking point comes, the market could be caught off guard by an earnings shortfall—and punish the stock. However, if management can continue to dodge inflation headwinds, the path to $2,000 looks much smoother.
There's at least one Wall Street firm that thinks the shares could be smooth sailing from here. Last week Piper Sandler referred to Chipotle as "The Next Chipotle," a tongue-in-cheek show of confidence in the growth that lies ahead. The analyst gave the stock an extra spicy $2,500 price target that suggests 50% upside. Most analysts that updated their views since the Q2 report also consider the stock a buy, but none leapt to a $2,000 target. Piper Sandler just blew right past that mark in the express Chipotlane!
From a valuation perspective, like its food, Chipotle isn't cheap. Yet it has always commanded a premium valuation that most consider warranted due to its superior growth metrics. At 63x trailing earnings though, it is trading well below its five-year historical average of 78x. Multiple expansion to that average would make it a $2,000-plus stock.
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