Retail

Why One Analyst Now Sees Chipotle Stock Rising to $1,200

Jon C. Ogg

Published: June 1, 2020 3:42 pm

Investors love a good growth story, and growth stories almost always command a handy valuation premium versus established companies or against value stocks. Despite the notion that the world might be on fire in the midst of the COVID-19 pandemic-induced recession, Chipotle Mexican Grill, Inc. (NYSE: CMG) has seen its shares surge to record highs.

Friday’s top analyst upgrades and downgrades included Chipotle, but what really stood out was that this was the current street high and it appears to be the highest price target that has ever been issued to the fast casual dining stock. Chipotle was reiterated as Outperform at Wedbush Securities, and the price target was raised to $1,200 from $870.

Nick Setyan, the analyst behind the call has said that his own checks are now pointing to a continued ramp in same-store sales growth. He increased his second quarter estimates to reflect a top line (revenue) recovery ahead of the firm’s own estimates and ahead of the consensus estimates.

To get such a high price target implies a longer view considering that it is so much higher than the consensus. Setyan increased his second-half expectations and how is looking out now model 2022 average unit volume of more than $2.5 million.

While his near-term margin visibility is limited, Setyan even believes that his 2022 expectations could prove to be conservative. Another long-term benefit here is higher unit growth as well as more profitable unit growth looking increasingly likely.

Setyan increase the Wedbush 2020 earnings estimate to $10.43 from $5.59 per share. While that is approaching 100-times earnings for this year’s valuation, the analyst call points to $19.97 EPS versus a prior target of $16.12 EPS for 2021. The 2022 EPS target was raised to $26.75 from $23.23.

Analysts never model growth companies based on current year forecasts, and sometimes they are looking well over the horizon. Still, this is valuing Chipotle at about 47-times expected 2022 EPS and backing out the cash. That is still a 25% premium to historical views.

The Wedbush report notes that this premium is justifiable given its own expectations of accelerated growth post-COVID as Chipotle’s market share gains accelerate.

Just last week, Chipotle was looking overvalued with some other high-flyers. Other analysts may now be emboldened to hike targets now that the street-high target price is much higher than the consensus price target not even being at $900 yet.

Chipotle shares were last seen trading up 4.6% at $1,050.59 on Monday afternoon. Its all-time high was put in one week earlier at $1,087.00. Chipotle’s prior peak was closer to $935 in February before the sell-off reached a panic mode, and this stock briefly traded under $500 at that selling climax in March. Now its shares have more than doubled.