Chipotle Mexican Grill Growth Is Priced In, Shares Fall
Chipotle Mexican Grill (NYSE: CMG) had a good quarter to be sure but there is a specter hanging over the company’s head. Revenue may be growing and it might be outperforming the Pricetargets.com consensus estimate but it is priced into the market. Trading at 44X its earnings with revenue growth slowing from the mid-20% range of last year to the low-teens of this year the stock is due for a correction. The question is how deep will it be and how long will it last?
The analysts are still buying into the Chipotle growth story so the pullback may not be very deep. There are 30 analysts rating the stock a firm Buy and that did not change following the release of results. What did change was the consensus price target because at least 5 of the 30 have come out with commentaries. Four of the 5 lowered their targets to a range of $1530 to $1830 compared to the consensus of $1925. That range includes the new low price target which is still 7% above the current price action. The fifth commentary upped its price target to $1925 and in-line with consensus or about 35% of upside. Regardless, the analysts, even the most cautious, see this stock trading higher.
Chipotle Beats On Organic Strength And Expansions
Chipotle had a good quarter with organic growth, expansion, and digital strength all present. The company reported $2.02 billion in net revenue for a gain of 16.1% over last year. The strength was driven by a 9.0% comp and a 33% increase in in-store sales that were underpinned by pricing increases across the menu. Revenue was also bolstered by the addition of 51 new stores, 42 of which include the new Chipotlane drive-thru feature. Digital continues to be a key element as well and represented 41.9% of total sales.
Moving down the report, the company is experiencing higher costs in the form of commodity, freight, and labor but was able to offset a portion of that impact through pricing efforts. The restaurant level margin fell by 160 basis points, however, but operating level efficiencies ultimately provided a 10 basis point improvement to earnings power. On the bottom line, the $5.70 in adjusted earnings is up 6.3% from last year and beat by $0.07 or about 1.2% to outpace revenue strength.
Turning to the guidance, the outlook is good but there are some problems for the market. The 10% to 12% in revenue growth for the year is not only in-line with the expectations but expects sequential declines in YOY growth from this quarter forward. The guidance is also expecting the opening of 235 to 250 new stores but also assumes problems with permitting and materials availability will not worsen. Because there have been some indications of improving materials in other reports we see some upside risk to the outlook but not enough to get us excited.
The Technical Outlook: Chipotle Is Still Rangebound
Price action in Chipotle Mexican Grill has been rangebound since the start of the year and that has not changed. The Q1 results were not enough to spark a major move either way but the bias is to the downside. As of now, CMG is trading near the middle of the range without a catalyst to drive it higher. The indicators are also in line with weakening prices so we are expecting to see the stock drift lower and retest the bottom of the range near $1300 if not move lower. If the analysts or institutions lose faith in the outlook the stock could move below $1300 and enter a more protracted selloff.
Companies in This Article:
