Daily Stock Watch: Is CMG Recession Proof?

By Kirsteen Mackay


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Restaurant chain Chipotle Mexican Grill (NYSE: CMG) beat earnings estimates showing consumer resilience, despite raising prices three times.

Is Chipotle Recession Proof?

Chipotle Mexican Grill (NYSE: CMG) stock is down over 4.6% in early trading after climbing almost 2.5% in yesterday's session. The company reported upbeat Q3 earnings, with operating income up 40.3% and comparable restaurant sales up 7.6% as margins expand.

FactSet analyst estimates reached an EPS consensus of $9.19 and a sales consensus of $2.23bn. The actual results returned EPS of $9.51 and sales of $2.22bn. So, although earnings beat, sales came in slightly below expectations.

What Does Chipotle Mexican Grill Do?

Chipotle Mexican Grill, Inc. owns and operates Mexican restaurants. The company offers burritos, burrito bowls, quesadillas, tacos, and salads. Chipotle Mexican Grill serves customers worldwide.

Chipotle is cultivating a better world by serving responsibly sourced, classically cooked, real food with wholesome ingredients without artificial colors, flavors or preservatives.

As of September 30, 2022, the company had nearly 3,100 restaurants in the United States, Canada, the United Kingdom, France and Germany. It is the only restaurant company of its size that owns and operates all its restaurants.

Chipotle is ranked on the Fortune 500 and is recognized on the 2022 list for Fortune's Most Admired Companies.

With over 100,000 employees passionate about providing a great guest experience, Chipotle is a longtime leader and innovator in the food industry.

How Does Chipotle Make Money?

Chipotle Mexican Grill makes money from selling its fast-casual Mexican food to diners in its restaurants, along with takeaway sales ordered through its digital channels.

In 2021, the company reported annual sales of $7.5bn and a net income of $653m. Fiscal 2022 estimates expect revenues of $8.7bn and profits of $935m.

Q3 Earnings Results

  • Total revenue rose 13.7% to $2.2bn.

  • Comparable restaurant sales increased by 7.6%.

  • In-restaurant sales increased 22.1%, while digital sales represented 37.2% of food and beverage revenue.

  • The operating margin was 15.1%, an increase from 12.3%.

  • Restaurant-level operating margin was 25.3%.

  • Diluted earnings per share (EPS) was $9.20, a 28.1% increase from $7.18.

  • Adjusted diluted EPS, which excluded a $0.31 after-tax impact from expenses, was $9.51, a 35.5% increase from $7.02.

  • Chipotle opened 43 new restaurants, with 38 of these including a Chipotlane.

Brian Niccol, Chairman and CEO of Chipotle, said:

Our performance in the third quarter confirms our brand and value proposition remain strong, even during a challenging economic environment

With consumer discretionary spending tightening, we are focused on running great restaurants and delivering excellent customer and employee experiences.

Forward Guidance

For 2022, Chipotle management anticipates:

  • Q4 comparable restaurant sales growth in the mid to high-single digits

  • Between 235 to 250 new restaurant openings (including 10 to 15 relocations to add a Chipotlane), which assumes construction, permit, and material supply delays don't worsen

  • An estimated underlying effective full-year tax rate between 25% and 27% before discrete items

In 2023, Chipotle management anticipates:

  • 255 to 285 new restaurant openings

CMG Stock Financial Metrics

CMG stock has a price-to-earnings ratio (P/E) of 59.30. Its price-to-book-value (P/BV) is 20.52. Chipotle does not offer a shareholder dividend.

These financial metrics suggest the $43.59bn company is perhaps overvalued, so although it shows resilience, it could be subject to a downwards rerating if the overall market tanks.

However, the balance sheet remains strong, and it ended Q3 with over $1.2bn in cash, restricted cash and investments with no debt, along with a $500m untapped loan facility.

Over the past year, CMG stock has traded between $1,196.28 and $1,895.99. Today it trades at around $1,584.02. Year-to-date, the Chipotle Mexican Grill stock price is down -6.31%, while the S&P 500 is down -19.54% over the same period. 

Analyst Ratings

FactSet analysts have a consensus Overweight rating on CMG stock with a target share price of $1,808.97.

  • Bernstein has adjusted its price target on Chipotle Mexican Grill to $1,900 from $2,000 while keeping its Outperform rating.

  • Jefferies has adjusted its price target to $1,575 From $1,530, maintaining its Hold rating. 

  • Gordon Haskett revised upwards to $1,800 From $1,750, reiterating its Buy rating.

  • Barclays adjusted its Chipotle share price target to $1,510 From $1,500, keeping an Equalweight rating.

  • KeyBanc has adjusted its price target to $1,800 From $1,750, reiterating its Overweight rating.

  • Goldman Sachs amended its price target on Chipotle Mexican Grill to $1,860 From $1,840, reiterating its Buy rating.

  • Stephens has adjusted its CMG price target to $1,760 From $1,900, reiterating its Overweight rating.

  • RBC raised its CMG share price target to $1,850 From $1,825 and maintained its Outperform rating.

  • Citigroup revised upwards to $1,888 From $1,867, reiterating its Buy rating.

  • Truist Securities has adjusted its price target on Chipotle stock to $1,825 From $1,760, reiterating its Buy rating.

Chipotle Mexican Grill Growth Potential and Risks

Chipotle has ambitious plans to grow by adding over 235 restaurants this year and over 255 next year. Although it's raised its prices three times in 15 months, the company remains competitive to peers, and its observation of consumers is that their purchase choices have remained consistent. This is reassuring to hear in the current inflationary environment.

Nevertheless, the company faces increased input costs, up over 20% in the last two years. Plus, it noted a decline in lower-income traffic in Q3, although most of its customer base is in a higher-income bracket.

Chipotle's growth strategies include:

  • Running successful restaurants with a people-accountable culture that provides excellent food with integrity, while delivering exceptional in-restaurant and digital experiences.

  • Amplifying technology and innovation to drive growth and productivity at its restaurants and support centers.

  • Making the brand visible, relevant, and loved to improve overall guest engagement

  • Expanding access convenience by accelerating new restaurant openings.

  • Sustaining world-class people leadership by developing and retaining diverse talent at every level.

Is CMG Stock a Good Investment?

It's reassuring to see Chipotle continue to post higher revenues despite raising prices. This is a challenging time for consumers, and CMG has proved to be a defensive business. However, if we slip into a recession, which many believe is already here, consumers may be forced to dial back their spending, and Chipotle could suffer.

While the Fed's price hikes appear to have inflation under control, for now, the strength in the dollar, compared to other currencies, undoubtedly helps. If the dollar value falls, inflation could reignite. There are still many moving parts affecting the economy overall, and companies like Chipotle still face the risk that footfall and growth will slow.

Chipotle's business is strong and popular with consumers, but CMG stock appears overvalued and could easily have further to fall. Without a dividend to cushion the blow, it seems there are better-valued alternatives to invest in right now.

If you enjoyed our Chipotle Mexican Grill coverage, you might be interested in our recent Daily Stock Watch articles or our IPO coverage.

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This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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