Why Wall Street Is Tapping the Breaks for Chipotle

Chipotle Mexican Grill, Inc. (NYSE: CMG | CMG Price Prediction) has recovered all of its lost ground and then some from when its customers were getting sick from its food contamination. In fact, heading into Wednesday’s earnings report the stock was up 63% since the last closing price of 2019.

The casual dining company posted $3.76 in adjusted earnings per share (EPS) on $1.60 billion in revenue. Those were both higher than Refinitiv’s consensus estimates of $3.40 in EPS and revenue of $1.59 billion. The same quarter of 2019 had results of $3.82 per share and $1.4 billion in revenue.

Chipotle shares had traded up 1.3% to $1,366.66 ahead of earnings on Wednesday, but the reaction on Thursday afternoon was still a drop of about 4.7% at $1,302.65. Seeing a sell-off of this magnitude is not abnormal considering the huge gains that had been seen, but there may be more than just profit taking here.

During the most recent quarter, comparable restaurant sales increased by 8.3%. Comparable restaurant sales were strong in each month of the third quarter with August being the high point. Sales trends remained strong in September, but there are some margin pressures as the company is expanding delivery options.

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Wall Street analysts have chimed in with their post-earnings reactions. While the analysts were not unilaterally negative, this pullback is still valuing Chipotle at 120 times current year earnings (EPS) expectations and about 62 times next year’s consensus analyst expectations.

One theme that seems to be an issue is that Chipotle has managed to do well during the pandemic with its expansive online ordering efforts, carry-out and drive up options.

Moving more of its business into delivery with expanded partnerships is going to come with lower margins, and this was cited in different iterations in multiple research reports. It’s also going to be hard to maintain trends where digital sales rose 200% and accounted for nearly 49% of its business. The company even noted that restaurant level operating margin was 19.5%, a decrease of 1.3%.

Here is how the analyst brigade has decided to treat Chipotle with ratings and price targets after the earnings report. For a reference point, Chipotle’s stock had a consensus analyst price target of $1,310.26 heading into the report.

Wedbush Securities was among the most bullish on the surface as the firm reiterated its Outperform rating and $1,600 target price. The firm noted that quarterly commentary was slightly below expectations despite beating expectations for the last quarter. Wedbush even lowered earnings estimates to $10.79 EPS from $11.12 EPS due to the timing of a solution for delivery creating near-term margin uncertainty.

Barclays maintained its Equal Weight rating and raised its target to $1,100 from $1,075.

BMO Capital Markets reiterated its Market Perform rating but raised its target to $1,200 from $1,050.

BTIG reiterated its Buy rating and raised its target to $1,450 from $1,375.

CFRA reiterated its Hold rating but still raised its target to $1,400 from $1,200.

Cowen reiterated its Outperform rating and its target price was raised to $1,550 from $1,400 at Cowen.

Deutsche Bank reiterated its Hold rating and raised its target to $1,235 from $1,555.

Jefferies reiterated its Hold rating but still raised its target to $1,200 from $1,100.

Morgan Stanley maintained its Equal Weight rating on valuations and cut its target down to $1,253 from $1,285.

Wells Fargo reiterated its Overweight rating and its target was trimmed to $1,455 from $1,460.

Chipotle still has much more room to boost its store count, and the delivery options are not likely to persist forever. The company opened 44 new restaurants and closed 3 restaurants during the quarter, and it noted that about 10 restaurants inside of malls and shopping centers remain closed.

The company’s total restaurant count of 2,710 stores can continue to rise, but a lot of good news has already been priced in here. Wall Street’s consensus price target has been chased higher and higher, as that consensus was $899.00 heading into the first earnings report of 2020 on February 4.  have already been jumped up hand

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