Why BofA Is Raising Price Targets For Chipotle, Starbucks

The restaurant sector is getting increased attention Monday after BofA Securities boosted its price targets on two of the more closely followed stocks: casual fast food chain Chipotle Mexican Grill, Inc. CMG and coffee chain Starbucks Corporation SBUX

The Chipotle, Starbucks Analyst: Gregory Francfort maintained a Neutral rating on Chipotle Mexican Grill with a price target lifted from $1,200 to $1,325.

The analyst also maintained a Neutral rating on Starbucks with a price target lifted from $82 to $88.

Chipotle: 'Surprising' Performer: Chipotle outperformed initial expectations during the COVID-19 pandemic, as the company has minimal drive-through exposure, Francfort said in a note.

Instead, the restaurant chain showed better-than-expected comps in recent quarters, the analyst said. Chipotle will emerge from the pandemic with a better market share position, he said. 

Chipotle will also be in a position to acquire real estate assets from the estimated 30,000 to 80,000 restaurants that are expected to permanently close due to the pandemic, Francfort said. 

Beyond the near-term, Chipotle is expected to move above the $2.5-million average unit volume milestone in 2022, with a restaurant-level margin of 22.5%, the analyst said.

Over the longer-term, Chipotle is projected to oversee 5,000 stores with a $3.5-million AUV, 25% to 26% restaurant margins and a low 4% G&A rate, he said. 

Despite a favorable outlook, Chipotle's stock is trading at 59 times 2021 estimated EPS, and it is "difficult to make a compelling bull case" at these levels, according to BofA. 

Improving Trends At Starbucks: Starbucks management said during a recent virtual sell-side conference that U.S. comps improved from negative 19% and negative 14% in June and July, respectively, to down 11% in August, Francfort said in a note.

Trends similarly improved in China from negative 16% in June and negative 14% in July to down 4% in August, the analyst said. 

Starbucks also noted customers are becoming more comfortable with in-store ordering and pick-up.

The company should have positive China comps by the end of December and positive U.S. comps by the end of March 2021, he said.

Yet this outlook appears to be "a bit on the aggressive side," Francfort said. 

Starbucks is scheduled to report full fiscal fourth-quarter sales and earnings along with guidance for the coming quarter on Oct. 29, the analyst said.

Any longer-term outlook will likely come weeks later during a scheduled Investor Day presentation on Dec. 9, he said. 

"We think Starbucks should benefit as consumers return to offices and normalize breakfast routines but the timing of that return to offices remains unclear."  

CMG, SBUX Price Action: Shares of Chipotle were trading down slightly at $1,246.13 at last check Monday, while Starbucks shares were up 1.48% at $85.55. 

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