The Street Debates What's Next For Chipotle

Chipotle Mexican Grill, Inc. CMG reported third-quarter results that exceeded expectations, highlighted by better-than-expected same-store sales growth of 11% versus 9% expected and an increase in net income from $38.2 million last year to $98.6 million.

Flawless Quarter

Chipotle's quarter shows if there are any flaws in the business model it is "hard to see them with the naked eyes," Morgan Stanley analyst John Glass wrote in a note. Specifically, comps and traffic both accelerated on a one-year and two-year basis due to continued momentum in digital and delivery.

Digital sales rose 88% from last year and accounted for 18.3% of total revenue, Stephens analyst Will Slabaugh wrote in a note. This marks a "national evolution" for the company while loyalty members rose from five million last quarter to seven million. The growth in loyalty also puts management in a better position to target lower frequency and non-core customers.

Related Link: Wedbush Dishes Up 4 Reasons To Like Chipotle Mexican Grill

What's Next?

Chipotle's momentum has some investors questioning why management didn't lift its 2019 same-store growth guidance to a low double-digit figure, Wedbush analyst Nick Setyan said. Instead, management issued a conservative guide at the high-end of its prior 'HSD range' guide due to tougher comparisons in December.

"We believe CMG is poised to sustain outsized SSS and EPS growth in the near, medium, and long-term in an industry where a dearth of growth is likely to command an increasing premium," Setyan wrote.

Chipotle's quarter continues to make the case for a bull case EPS of $20 per share in 2020, KeyBanc Capital Markets analyst Eric Gonzalez said. Management's guidance could be beaten from supply chain efficiencies, labor scheduling improvements, higher sales leverage from menu innovation and continued digital growth.

"Consensus estimates do not fully contemplate what is possible under this management,"Gonzalez wrote.

Valuation Concerns

Chipotle's earnings beat is notable after a prior history of food safety incidents and menu missteps, Longbow Research analyst Alton Stump said, but the recovery is also ready reflected in the stock's premium valuation at current levels.

Specifically, Chipotle's stock was valued at around 26 times estimated 2020 EV/EBITDA versus the restaurant peer group's five-year historical average of around 11 times to 12 times.

Ratings And Price Targets

• Morgan Stanley maintains at Equal-Weight, price target lifted from $746 to $797.
• Stephens maintains at Equal-Weight, price target lifted from $700 to $800.
• Wedbush maintains at Outperform, $980 price target.
• KeyBanc maintains at Overweight, price target lifted from $870 to $900.
• Longbow maintains at Neutral.

Chipotle's stock traded lower by 5.5% to $785.49 per share at time of publication.

Photo credit: Chis Potter, Flickr