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Chipotle cooks another run for $2,000

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Last year, Chipotle Mexican Grill, Inc. (NYSE: CMG) came in price of a pair of burritos at $2,000 a share. A booming digital company linked to the pandemic munchies propelled the stock to an all-time high. Nine months later, it dropped below $1,200.


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Now more than 30% higher than the summer 2022 low, Chipotle starts hissing again. Restaurants have reopened and recent financial reports are impressive.

Customers have yet to forgo higher prices for free-range chicken quesadillas and other popular menu items. But can this continue?

For now, a strong fast-serve food brand jettisoned by drive-through lane innovation seems to be putting Chipotle on a collision course with the elusive $2,000 mark. Let’s take a look under the lid and see why the stock is boiling – and what it takes to get it “done right.”

How is Chipotle performing this year?

Last month, Chipotle announced its second-quarter revenue was up 17% thanks to increased in-store traffic and digital orders. Thriving relationships with third-party delivery apps Grubhub and UberEats (complete with reductions in delivery costs) helped boost the online business, which now accounts for nearly 40% of total revenue.

Year-to-date, the company has brought in $4.2 billion in revenue, compared to $3.6 billion in the first half of 2021. First half earnings per share (EPS) are as much as $15.00 , an improvement of 17% compared to last year.

Chipotle’s return on equity (ROE), a good measure of management performance, is 34% over the subsequent 12-month period. This is roughly equivalent to competitors such as Restaurant Brands International and Wendy’s, and miles for restaurants whose profits are lower year-over-year, such as Domino’s Pizza and Yum Brands.

Another area where Chipotle stands out is the strength of the balance. It left 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 are Chipotle’s growth prospects?

After opening 42 new restaurants in the past quarter, Chipotle plans to build on its now 3,108 locations. By the time the calendar flips to 2023, as many as 250 new restaurants are expected to open by 2022.

An important growth initiative in these restaurants is Chipotlane. This is the chain’s new dedicated drive-through lane for online orders. Consumers are finding Chipotlanes a convenient way to pick up their food without getting caught up in frustrating growls from traffic. Venues using this format have been a big sales driver grow and margin expansion. Most of the restaurants that opened last quarter have Chipotlanes and given their positive impact on finances, we can expect more.

Aside from the expansion of stores and Chipotlane, Chipotle is positioned to drive growth from investments in its mobile ordering and delivery platforms. The occasional temporary menu item or promotion sprinkled in will likely be in the recipe for future growth as well.

Over the long term, management is targeting high single digit sales growth. If it can continue to reap the benefits of strong digital demand and effective cost containment, this will also be accompanied by a healthy side of earnings growth above that of the industry. Current consensus forecasts for 2022 and 2023 EPS imply 31% and 30% growth, respectively.

Will Chipotle Stock Hit $2,000?

In the medium term, the biggest concern around Chipotle is its ability to pass on higher costs to consumers. How much longer inflation puts pressure on US budgets, the harder it will be to attract low-to-middle-income consumers. So far it has managed to contain increased labor, food and delivery costs, but if a breaking point comes, the market could be caught off guard with an income shortfall – and the stock could be punished. However, if management can continue to dodge the headwinds of inflation, the path to $2,000 looks much smoother.

There’s at least one Wall Street firm that thinks stocks could float smoothly from here. Last week, Piper Sandler called Chipotle “The Next Chipotle,” an ironic vote of confidence in the growth ahead. The analyst gave the stock an extra spicy price target of $2,500, indicating a 50% increase. Most analysts who have updated their views since the Q2 report also view the stock as a buy, but none jumped to a $2,000 target. Piper Sandler just flew past that mark in the Chipotlane express!

From a valuation perspective, Chipotle, like its food, is not cheap. Still, it has always held a premium valuation that most believe is justified by its superior growth metrics. However, with lagging profits of 63x, it is trading well below the historical five-year average of 78x. Multiple expansions to that average would make it a share of over $2,000.

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