Bank Of America Upgrades Chipotle On Stronger Comps, Margin Outlook

Chipotle Mexican Grill, Inc. CMG could beat near-term consensus expectations, backed by strong sales momentum, normalizing avocado prices and initiatives to improve margins, according to Bank of America.

The Analyst

BofA’s Gregory Francfort upgraded Chipotle Mexican Grill from Underperform to Neutral raising the price target from $590 to $850.

The Thesis

Chipotle Mexican Grill has added delivery sales layers, improved customer facing digital platforms and taken initiatives to improve head office and store level operations, Francfort said in the upgrade note.

While the company may not return to peak margins due to these initiatives, strong comps and EPS growth should support its stock valuation, the analyst added.

There’s been a sharp increase in Chipotle Mexican Grill’s digital sales, which represent a significantly higher average order price versus traditional orders, Francfort said. The increased proportion of digital orders is what has contributed the most to growth in the company’s average unit volume (AUV) year-to-date.

Francfort further noted that the 59% correction in avocado prices since the second quarter should boost Chipotle Mexican Grill’s margins in the third and fourth quarters.

The analyst raised the EPS estimates for fiscal 2019 and 2020 from $12.70 to $13.70 from $15.50 to $17.15, respectively, to reflect an improved comp and margin outlook.

Price Action

Shares of Chipotle were up 2% to $844.96 at the time of publishing on Friday.

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