Chipotle Shares Are Soaring, But Some Analysts Remain Bearish

Chipotle Mexican Grill, Inc. CMG reported fourth-quarter results that handily exceeded expectations from a growth in comparable sales and total transactions. Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• Morgan Stanley's John Glass maintains an Overweight rating on Chipotle Mexican Grill with a price target lifted from $600 to $617.
• Bank Of America's Gregory Francfort maintains at Underperform, price target lifted from $340 to $400.
• UBS' Dennis Geiger maintains at Sell, price target lifted from $370 to $400.
• KeyBanc Capital Markets' Eric Gonzalez maintains at Overweight, price target lifted from $525 to $625.
• BMO Capital Markets' Andrew Strelzik maintains at Market Perform, price target lifted from $420 to $540.
• Raymond James' Brian Vaccaro maintains at Market Perform.

Shares of Chipotle were trading higher by more than 13.5 percent Thursday morning and hit a new 52-week high of $599.35.

Morgan Stanley: Recovery 'Well Underway'

Chipotle's earnings report solidifies the company's turnaround from food scare-related scandals is "well underway," Glass said in a research report. For example, multiple initiatives including a free delivery promotion contributed to a 6.1 percent same-store sales growth and management has many other initiatives in the pipeline to support further growth.

Two other encouraging readouts from the quarter: 1) Digital was the "clear winner" highlighted by a 66 percent year-over-year growth and accounted for 12.9 percent of total sales, 2) Restaurant level margins of 17 percent was the "biggest upside surprise" versus expectations of 16.4 percent

Bank Of America: 'Strong Company' But Concerning Valuation

Chipotle's report makes it clear the "strong company" is seeing signs of success from a sales growth plan, Francfort said. But this shouldn't distract from the stock's lofty valuation at 45 times forward P/E, which is already a premium to its historical range of 25-40 times forward earnings. Such a high premium can't be justified as revenue growth over the next few years are likely to come in at a high-single digit.

By comparison, from 2009 to 2014 revenue grew at around 20 percent during which time the stock's multiple also traded at "more inflated levels."

Related Link: McDonald's, Restaurant Brands, Chipotle Are Morgan Stanley's Top Restaurant Picks In Challenging Year For Sector

UBS: How Sustainable Are The Results?

Chipotle's stock is up about 30 percent in 2019 and Thursday's gains implies shares are trading at 25 times EBITDA, Geiger said. This implies "elevated" expectations and continued momentum, but 6.1-percent same-store sales growth seen in the recent quarter is likely unsustainable as it was boosted by limited time offers like free delivery. As such, a more realistic outlook of 5.5 percent same-store sales growth in 2019 and 4.0 percent in 2020 limits upside potential for the stock.

KeyBanc: $20 EPS Next Year A Possibility

Chipotle's earnings print supports the case for EPS expansion in fiscal 2019 from an estimated $12.26 to $15.55 in fiscal 2020, Gonzalez said. Under a bull-case scenario, the company could hit $20 EPS in 2020 as management's guidance in the earnings report may not include full benefits from supply chain efficiencies, labor scheduling and higher sales leverage.

BMO: Expectations May Not Match Up With Reality

Chipotle delivered encouraging earnings but future performance may not live up to expectations, Strelzik said. Initial results from drive-thru was favorable, but it's not yet known how many units can accommodate this change.

Benefits from food costs, closures of underperforming units and outsized check growth could dissipate moving forward. This implies a more limited margin expansion beyond 2019 which may be of concern as investors are likely to soon shift attention away from same-store sales towards margin growth.

Raymond James: No Room For Error

Chipotle's underlying fundamentals remain strong, but the stock's multiple is approaching 40 times 2020 estimated P/E, Vaccaro said. This "elevated" valuation already reflects high expectations but also implies management has minimal room for any missteps.

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