Why Chipotle Finally Looks Safer Again, for Diners and Investors Alike

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The long saga of the Chipotle Mexican Grill Inc. (NYSE: CMG) and its food fiascos finally may have seen its worst. In fact, an almost 20% gain in the shares after the earnings report may be signaling something even larger. Chipotle shares have now rallied a whopping 60% from the post-panic lows, and many analysts on Wall Street are still hanging on to a very cautious or negative stance.

24/7 Wall St. covered Chipotle’s earnings in depth, seeing a 33% earnings gain on a revenue that was more than 7% higher. Year over year, margin improvement was 180 basis points, rising to 19.5% from 17.5%. Food costs were 32.4% of sales, down 140 basis points from a year ago. Chipotle also anticipates another 130 to 150 new store openings this year.

When analysts remain negative all the way back up, it means that the sentiment was so bad that they just cannot look on the bright side. That said, it would be silly for investors to just assume that there now will be a magic straight line up to the sky for Chipotle shares.

Most multiyear debacles do not recover overnight. With this stock back at $400, even with a 60% recovery from its lows, it is still far shy of the all-time highs above $700 when everything was going smoothly for Chipotle. It would be a fool’s game to expect that the old highs are coming back any time soon. Still, a recovery of this magnitude likely implies that the worst parts of the company’s fiascos are over and that it is back on the recovery path.

24/7 Wall St. has tracked multiple analyst upgrades and price target hikes after the earnings report. Many of these calls are still quite cautious despite the huge recovery.

BTIG raised Chipotle shares to Buy with a new $460 price target. The firm talked up margins rising faster than previously expected and that the leadership change will add perspective, with more efficiencies and driving innovation.

Merrill Lynch maintained its Underperform rating and raised its price objective to $310 from $270. The Merrill Lynch note warned:

Despite the positives of open-minded new leadership, we believe CMG is overvalued at current levels barring reacceleration in comps to mid- to high-single digits (which we do not expect). We think a new incentive compensation matrix has investors excited about the possibility of $14-$17 of 2020 EPS, but we think the probability of achieving mid-teens EPS is low.

While Wedbush Securities maintained a Neutral rating, it raised its target price to $350 from $325. The firm still sees comparable sales trending under expectations and any visibility into drivers of unit-level margins rising toward the high end of 17.5% to 18.5% guidance remains limited.

Canaccord Genuity raised its rating to Buy and its target price to $425 from $300.

Cowen raised its rating on Chipotle to Market Perform from Underperform with a higher $350 price target.

Guggenheim raised its rating to Neutral from Sell.

SunTrust Robinson Humphrey reiterated its Buy rating and raised its target to $410 from $380.

Price target changes without ratings changes are shown below:

  • Barclays (Equal Weight) raised its target to $320 from $305.
  • BMO Capital Markets raised its target to $350 from $275.
  • Deutsche Bank (Sell) raised its target from $260 to $285.
  • Jefferies raised its target price to $350 from $300.
  • JPMorgan (Neutral) raised its target to $365 from $320.
  • Morgan Stanley (Equal Weight) raised its target from $310 to $340.
  • RBC Capital Markets raised its target from $340 to $360.
  • Stephens raised its target price to $350 from $285.
  • Stifel (Hold) raised its price target to $325 from $275.

Chipotle’s most recently reported short interest was 3.67 million shares. That was almost six days to cover and was almost 15% of its float. There is almost no doubt that some of the post-earnings gain is attributable to a short squeeze, forcing short sellers to buy shares in the market to cover their positions.

Chipotle shares were last seen trading up almost 20% and were right around the $400 level. its 52-week range is $247.52 to $499.00.

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