Chipotle Mexican Grill Stock Is An Uptrend With Legs
Chipotle Mexican Grill (NYSE: CMG) is an investment story that just keeps getting better. What was once a stock languishing in the wake of a food-borne-illness scandal is now a vibrant post-pandemic growth story with legs. The reason is simple, CEO Brian Niccol was the right man at the right time, his efforts to modernize the image, invest in new menu items, and build out a robust eCommerce presence are the foundation for the company’s success today. In our view, this stock was very attractive before the Q3 report was released, now it is more attractive than ever. While the impacts of the global supply chain crunch can be seen in the results the company has proven more than capable of working around the problems.
Chipotle Clear A High Bar, Margins Widen
Chipotle Mexican Grill squeaked past the consensus for revenue by 50 basis points. 50 basis points is not a large beat nor is it one to inspire the market to rally but within that, growth remains very strong. Chipotle Mexican Grill reported $1.95 billion in consolidated revenue which is good for a gain of 3.17% sequentially, 21.9% over last year, and 39% versus 2 years ago. Last year, sales rose 15% in the 3rd quarter so these gains are very significant.
Revenue growth is driven by a 15.1% increase in comp sales and the addition of 39 new stores. Digital, a driving force of the company's growth strategy, grew 8.6% and are 42.8% of sales. The only negative is that pricing increases over the past year are also in play. The silver lining is that customers are not pushing back and organic growth remains strong.
Moving down the report, Chipotle reports a 560 basis point increase in operating margin attributable to restaurant-level leverage and pricing increases. Those gains were partially offset by labor costs which increased as a percentage of sales. The salient point is that margins are widening and should remain favorable as we move into the end of the year. On the bottom line, the company’s $7.18 in GAAP earnings are up 154% over last year and beat the consensus by $0.80 while the $7.02 in adjusted EPS is up 86% and beat by $0.69.
Looking forward, organic growth is expected to decelerate to the mid-single digits but we see upside risk in the numbers. This guidance is expecting a sequential decline in revenue that we do not agree with. In our view, the company is more likely to produce a high-single to low double-digit revenue increase at least and there is also the addition of 200 new stores to anticipate, an addition that could be worth another 6% to 7% of growth or more.
The Analysts Will Push Chipotle Higher
The analyst’s activity in Chipotle was mixed but there is something to consider. While one of the four shout-outs included a price target decrease the other three were increases and all four maintained an Overweight or Conviction Buy rating. That’s pretty bullish in our view, especially considering their consensus price target is just over $2,150 compared to the $1907 Pricetarget.com consensus estimate. The broad consensus is only expecting about 3.5% of upside in the stock while the $2150 target adds a little more. The high price target of $2600 set by Piper Sandler in September, however, is more in line with our targets.
The Technical Outlook: Chipotle Mexican Grill Is Still Consolidating
Price action in Chipotle Mexican Grill is still consolidating in the wake of the most recent all-time high. The good news is that consolidation is maintaining support at a high level and appears to be a bullish flag on the weekly charts, at least for now. Assuming the Bullish Flag pattern plays out we would expect to see price action break to a new high within the next few weeks. In that event, targets in the range of $2,050 and $2,500 will come into play.
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