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September 01, 2020 1:41pm
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The Meteoric Rise of Chipotle Mexican Grill Stock is Not Over

Chipotlet Mexican Grill

The price action in Chipotle Mexican Grill (NYSE: CMG) has been smoking hot, and it is not over yet. The 1100% gain posted since 2017 is the tip of the iceberg for this fast-growing, fast-casual restaurant that is gaining leverage and on the brink of an international expansion. 

You might say that the ballistic rise in share prices and high 58X earnings price multiple are reasons to fear a correction, and you would be right, but there is a caveat. The company’s growth plans include doubling the North American business and expanding into international markets: international markets could outpace the North American segment over time, doubling the business again. In this light, corrections may come, but they will be met by eager buyers who drive the stock to new highs because of revenue and earnings growth. 

Analysts' sentiment aligns with an outlook for higher prices. The Q1 results and guidance led to 19 favorable revisions from analysts tracked by Marketbeat. The few reiterated ratings peg the stock with above-consensus ratings and price targets; the remainder include upward price target revisions that lifted the consensus by 22% compared to 30 days prior. 

The analysts' consensus price assumes fair value with the stock trading at new highs, but the fresh targets include the new high target of $3,600, which implies a 15% upside. Because the company outperforms, builds leverage, and guides for business strength, investors can assume that analysts' sentiment trends will continue to lead the market higher.

Chipotle Mexican Grill Had A Robust Quarter in Q1

[content-module:CompanyOverview|NYSE:CMG]Chipotle Mexican Grill proved the effectiveness of CEO Brian Niccol’s strategy again in Q1. The company brought in $2.7 billion in net revenue for a gain of 14.1% over last year to beat consensus by 110 basis points. Strength was driven by a 7% comp, a 5% transaction gain, and a 1.6% increase in check count. New stores are also in the mix; the company opened forty-seven stores during the quarter, increasing the count by 8% YOY. Chipotlanes and digital also aided growth and margin, accounting for 36.5% of the mix. 

Margin news is fantastic. The restaurant level operating margin improved by 190 basis points to 27.5% and was only partially offset by increased operating expenses. Operating margin improved by 80 bps to 16.3%, driving significant gains in GAAP and adjusted earnings. The adjusted earnings grew by 27.3% to $13.37, outpacing analysts' median forecasts by $1.70 or 1500 basis points, and strength is expected to continue. 

Guidance for the year is favorable. The company expects comps to run in the mid to high single-digits, compounded by the 8% increase in store count and plans to open more stores this year. The plan is for 285 to 315 stores in 2024, good for a rise of 8.6%. 

Chipotle's Stock Split Target is June 18th

Chipotle is planning a 50-for-1 stock split pending shareholder approval. The issue will be voted on in early June; if approved, it will be effective on June 18th. The move will significantly increase the number of shares, likely leading to volatility and a possible pullback to more attractive price points. The move will also reduce the cost of single-share ownership, increasing market participation over time. 

Chipotle’s share repurchases are unaffected other than the normal lock-up period, which has expired. The company repurchased only $25 million of shares in Q1 but plans to resume at a more normal pace now. The share count is down -0.6% compared to last year, and shareholders can expect repurchases to continue offsetting share-based compensation. 

Chipotle’s Technical Outlook is Robust

The technical outlook for CMG shares is robust. The rally from $262 to $1900 was strong and led to consolidation, break out, and continuation, bringing basic technical targets into play. The simple target is adding the magnitude of the rally to the breakout point, which gives a target of $3,500. That target aligns with the high-end of the analysts' range and is likely to be reached soon. A pivot above that level will bring the bull-case scenario into play: the percentage gain from $262 to $1900 or over 1100%. In that scenario, shares of this discretionary stock will double in value more than once over the next decade. 

CMG stock chart

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