Last year, Chipotle Mexican Grill, Inc. (NYSE: CMG) several burritos hit $2,000 per share. A booming digital business related to pandemic snacks drove the stock to record highs. Nine months later, it fell below $1,200.
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Now that Chipotle is up more than 30% from its summer 2022 lows, it’s starting to fizz again. Restaurants have reopened, and recent financial reports have been impressive.
Customers haven’t been hesitant about free-range chicken quesadillas and other popular menu items. But can this continue?
Right now, a mighty fast food brand abandoned by drive-thru innovation appears to be putting Chipotle on a collision course with the elusive $2,000 mark. Let’s take a look under the lid to see why the soup is cooking – and how to “do it well”.
How did Chipotle perform this year?
Last month, Chipotle announced a 17% increase in revenue for the second quarter, helped by higher in-store traffic volume and digital orders. Booming relationships with third-party food delivery apps Grubhub and UberEats (while also reducing delivery fees) have helped drive the online business, which now accounts for nearly 40% of total revenue.
Year-to-date, the company’s revenue was $4.2 billion, compared to $3.6 billion in the first half of 2021. Earnings per share (EPS) in the first half was even $15.00, up 17%
Chipotle’s return on equity (ROE) is a good measure of management performance, and in the past 34% over the 12-month period. That’s roughly on par with peers like Restaurant Brands International and Wendy’s, and miles ahead of restaurants with year-over-year profit declines like Domino’s Pizza and Yum Brands.
Another area where Chipotle stands out is balance sheet strength. It exited the second quarter with a cash position of $521 million and no long-term debt. This gives the company enough financial flexibility to pursue long-term growth opportunities.
What is the future of Chipotle?
After opening 42 new restaurants last quarter, Chipotle plans to build on its existing 3,108 locations make persistent efforts. By 2023, as many as 250 new restaurants are expected to open in 2022.
One major growth initiative these restaurants are working on is Chipotlane. This is the chain’s new dedicated drive-through lane for online orders. Consumers find Chipotlanes a convenient way to pick up meals without the frustrating traffic jams. Locations using this format have been an important driver of sales growth and margin expansion. Most of the restaurants that opened last quarter had Chipotlane, and we can expect more given their positive financial impact.
In addition to store and Chipotlane expansion, Chipotle is expected to gain growth from investments in its mobile ordering and delivery platform. The occasional limited-time menu item or promotion could also be a recipe for future growth.
Over the long term, management is targeting high single-digit revenue growth. If it can continue to reap the rewards of strong digital demand and effective cost control, this will also bring the healthy side of higher-than-industry earnings growth. Current consensus EPS forecasts for 2022 and 2023 imply growth of 31% and 30%, respectively.
Chipotle Stock Get to $2,000?
In the medium term, the main concern surrounding Chipotle is its ability to pass on higher costs to consumers. The longer inflation weighs on American budgets, the harder it will be to attract low- and middle-income consumers. So far, it has been able to manage increased labor, food, and supply bills, but if there is a breaking point, the market could be caught off-guard by the lack of earnings — and punish the stock. However, if management can continue to avoid inflation headwinds, the path to $2,000 looks much smoother.
At least one Wall Street firm thinks the stock could be smooth sailing from here. Last week, Piper Sandler called Chipotle “the next Chipotle,” a tongue-in-cheek display of confidence in future growth. The analyst has a super-spicy $2,500 price target on the stock, which implies a 50% upside. Most analysts who have updated their views since the second-quarter report also see the stock as a buy, but none jumped to their $2,000 target. Piper Sandler just flew that marker on the Chipotlane Express!
From a valuation standpoint, like its food, Chipotle isn’t cheap. However, thanks to its excellent growth metrics, it consistently commands a premium valuation that most would consider reasonable. However, it trades at 63 times trailing earnings, well below its five-year historical average of 78 times. Extending to that average multiple times would make it a stock above $2,000.