Why This Analyst Sees 15% Upside in Chipotle

Chipotle Mexican Grill Inc. (NYSE: CMG) has made a solid recovery this year off of its lows with the stock up 27%. The burrito chain posted a strong recovery in both comp sales and earnings in the first quarter, which coupled with the company’s new marketing initiatives, differentiated menu, unit expansion plans and strong balance sheet, could help push the stock even higher. Considering these, one key independent research firm weighed in on the stock and only sees shares going up from here.

Argus upgraded Chipotle to Buy from a Hold rating, with a price target of $550, which implies upside of 15% from the previous closing price of $478.80. The firm is looking for fast-casual restaurants such as Chipotle to grow faster than the overall restaurant industry. The company also appears to have moved past the food safety issues that damaged its reputation in 2015 and 2016.

In late April, Chipotle reported first-quarter results. Revenues rose 28% year-over-year to $1.07 billion, above the consensus estimate of $1.05 billion. The company opened 57 new restaurants, raising the store count to 2,291. Following a 29.7% drop from last year, same-store sales rose 17.8%, 110 basis points above the consensus estimate. The increase in comp sales was driven by higher customer traffic, fewer promotions and a higher average check.

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Later this year, Argus is looking for revenue to increase 18% to $4.6 billion, driven by a high single-digit increase in same-store sales, 200 new stores, higher menu prices and increased customer traffic. In 2018, the firm expects revenues to increase another 13% to $5.2 billion.

The firm further commented on Chipotle’s valuation in its report:

Chipotle shares have risen approximately 11% since our last note on February 21, as the company’s turnaround appears to be gaining traction. Although the shares trade at a relatively high 38-times our 2018 EPS estimate, we believe that they merit a higher multiple based on the company’s ability to cut costs and our expectations for a continued recovery in same-store sales. Our price target of $550 implies a multiple of 44-times our 2018 estimate and a total potential return of 15% from current levels.

Shares of Chipotle were last seen up 1% at $483.52 on Thursday, with a consensus analyst price target of $447.88 and a 52-week range of $352.96 to $499.00.

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